Chapter 6: Concepts/ Theory

Question 1

Price elasticity of demand (E)

Answer 1

measure of the responsiveness of quantity demanded to a change in price along a demand curve indicating the effect of price on consumer expenditure

Question 2

Formula for price elasticity of demand (E)

Answer 2

%change in Q/ %change in P= (change in Q/change in P)*(P/Q)= P/P-A, where A is the price intercept

Question 3

What is the responsiveness and numerical value when the price is elastic?

Answer 3

Responsiveness:
l%change in Ql > l%change in Pl
Numerical Value:
lEl > 1

Question 4

What is the responsiveness and numerical value when the price is inelastic?

Answer 4

Responsiveness:
l%change in Ql < l%change in Pl
Numerical Value:
lEl < 1

Question 5

What is the responsiveness and numerical value when the price is unitary elastic?

Answer 5

Responsiveness:
l%change in Ql = l%change in Pl
Numerical Value:
lEl = 1

Question 6

What does it mean for demand to be elastic?

Answer 6

consumers respond strongly to a change in price

Question 7

What does it mean for demand to be inelastic?

Answer 7

consumers do not respond strongly to change in price

Question 8

Total Revenue definition and equation

Answer 8

total amount paid to producers for a good or service
TR=P*Q

Question 9

What is the price effect? What is the relationship between P and Q?

Answer 9

the effect on TR of changing price, holding output constant
P and Q are inversely related

Question 10

What is the quantity effect?

Answer 10

the effect on TR of changing output, holding price constant

Question 11

Quantity effect: What direction does TR move in?

Answer 11

TR moves in the direction of the stronger effect, either P or Q

Question 12

How is the effect of a change in the price of TR determined?

Answer 12

the effect of a change in price of TR is determined by the price elasticity of demand (E).
when demand is elastic, the quantity effect dominates.
when demand is inelastic, the price effect dominates.

Question 13

What factors affect E?

Answer 13

availability of substitutes
percentage of consumer budget
time period for adjustment

Question 14

Interval (arc) elasticity

Answer 14

E calculated over an interval of a demand curve

Question 15

Point elasticity and how to find it

Answer 15

measurement of demand elasticity calculated at a point on the demand curve rather than over an interval
multiply the slope of demand (change in Q/ change in P) at the point of measure by the ratio P/Q computed from values at the point of measure

Question 16

What is the formula for point elasticity when demand is linear or curved?

Answer 16

E=P/ P-A

Question 17

What is the relationship between price and lEl?

Answer 17

For linear demands: direct relationship- the higher the price, the more elastic
For curvilinear demands: no general rule EXCEPT Q=aP^b

Question 18

Marginal Revenue (MR)

Answer 18

addition to TR attributable to selling one more unit of output, also the slope of TR

Question 19

Inframarginal units

Answer 19

units of output that could have sold at a higher price had a firm not lowered its price to sell the marginal unit
MR= P- revenue lost by inframarginal units

Question 20

What is MR when TR is maximized?

Answer 20

MR=0

Question 21

Where is MR when demand is linear?

Answer 21

half-way between the demand and price axes
MR is twice as steep as demand

Question 22

When MR > 0, what happens to TR and lEl?

Answer 22

TR increases as Q increases and P decreases
lEl is elastic

Question 23

When MR < 0, what happens to TR and lEl?

Answer 23

TR decreases and Q increases and P decreases
lEl is inelastic

Question 24

When MR= 0, what happens to TR and lEl?

Answer 24

TR is maximized
lEl is unitary elastic

Question 25

Income elasticity (Em) and formula

Answer 25

measure of responsiveness of quantity demanded to changes in income, holding all other variables in the general demand function constant
Em= %change in Q/ %change in M= (change in Q/ change in M) x (avg M/ avg Q)

Question 26

Cross-price elasticity (Exr) and formula

Answer 26

measure of responsiveness of Qd to changes in the price of a related good, holding all other variables constant
Exr= %change in Qx/ %change in Pr= (change in Qx/ change in Pr) x (avg Pr/ avg Q)

Question 27

What does it mean when Exr is positive? Negative?

Answer 27

Positive means the goods are substitutes
Negative means the goods are complements