Chapter 7 Flashcards
What does the price elasticity of demand tell us?
the price elasticity of demand tells us how sensitive consumers are when the price changes
How do you calculate the price elasticity of demand?
price elasticity of demand:
percent change in price
What does it mean when the ratio is bigger?
it means consumers are more sensitive and responsive to changes in price
What do the numbers found from price elasticity of demand tell us?
- price elasticity of demand is greater than 1: demand is price elastic
- price elasticity of demand is less than 1: demand is price inelastic
- price elasticity of demand equals 1: demand is unit elastic
What does the midpoint formula tell us?
the midpoint formula tells us the percentage change between two prices or quantities on a demand curve
What’s the midpoint formula?
the midpoint formula is
the change in quantity demanded average price
————————————————- x ————————
change in price average quantity
When’s demand for a good perfectly inelastic?
When changes in the price have NO EFFECT on the quantity demanded.
What does perfectly inelastic look like on a graph?
perfectly inelastic is a VERTICAL line.
When’s demand for a good perfectly elastic?
When a change in price causes the quantity demanded to change without limits
What does perfectly elastic look like on a graph?
perfectly elastic is a HORIZONTAL line.
The more vertical a good’s demand curve is, _____
the more INELASTIC it is
The more horizontal a good’s demand curve is, _____
the more ELASTIC it is
What’s the income elasticity?
income elasticity is how sensitive consumers are when their incomes change
How do you calculate income elasticity?
income elasticity:
percent change in the quantity demanded
————————————————————
percent change in income
What’re luxury goods?
as income increases, the demand for the good increases A LOT
What’re necessities?
as income increases, the demand for the good increases A LITTLE.
What does income elasticity tell us?
- income elasticity is greater than 1: the good is income elastic and is a luxury
- income elasticity is between 0 and 1: the good is income inelastic and is a necessity
- income elasticity is less than 0: the good is inferior
What’s the cross price elasticity of demand?
the cross price elasticity of demand is the sensitivity of consumption of good X to a change in the price of Good Y.
How to calculate the cross price elasticity of demand?
cross price elasticity of demand
percent change in the quantity demanded of good X
—————————————————————————-
percent chance in the price of Good Y
What does the cross price elasticity of demand number tell us?
- cross price elasticity of demand is less than zero means they are COMPLEMENTARY goods
- cross price elasticity of demand greater than zero means they are SUBSTITUTE goods
What’s the cross price elasticity of supply?
cross price elasticity of supply is how much the quantity supplied changes when the price changes
What’s the cross price elasticity of supply formula?
cross price elasticity of supply formula
percent change in the price of Good X
What does the cross price elasticity of supply tell us?
the greater the cross price elasticity of supply, the MORE SENSITIVE or RESPONSIVE suppliers are to a change in price
How do taxes affect the market equilibrium?
taxes create dead weight loss by moving away from equilibrium
What’s a revenue tariff?
a revenue tariff is a tax on imports
What’s a protective tariff?
a protective tariff is a tax on exports
How are tariffs and quotes similar in their economic effects?
- both raise prices
- both decrease consumer surplus
- both create deadweight loss
What’s utility?
happiness
How do you calculate marginal utility?
marginal utility equals
the change in total utility
————————————————-
the change in quantity demanded
What happens to marginal utility as you consume more of something?
marginal utility DECREASES with each additional unit
How do you get the most bang for your buck?
maximizing utility equation
marginal utility of good A marginal utility of good B
————————————- = ————————————–
price of good A price of good B
