Econ 101 Exam 2 Flashcards
As Price increases, the Quantity Demand decreases
Law of Demand
A general measure of responsiveness
Elasticity
The response of 1 valuable to changes in another valuable
Elasticity
Measures the responsiveness of QD to changes in the P
Price Elasticity of Demand
The % change in QD resulting from a 1% change in P
Price Elasticity of Demand
ED = ______/________
%change in QD/% change in P
ED= ______ - ________ / ______
new - old / old
When any event shifts S or D the equilibrium in the market ______.
changes
Compare old equilibrium to a new equilibrium
Comparative Statictics
Ed is always ______ because of the law of demand
negative
|ED| _____ as move down a linear, downturned-sloping D curve
decreases
Buyers + Sellers _____ prices up and down (like an auction)
‘bid’
There is only one price where _______ = _______
Quantity Supply = Quantity Demand
Equilibrium = _______ = ________
Quantity Supply = Quantity Demand
Equilibrium is also known as “________”
Market clearing price
There is _______ to change in equilibrium
no tendency
At any P not = to P*, QS _____ DS and there is disequilibrium
does not =
Excess supply
Surplus
Excess demand
Shortage
If P > P*, then QS _____ QD
>
There is _________ on the P + QS decreases and QD increases until QS = QD
downward pressure (surplus)
In a shortage there is ______ on the P.
upward pressure
3 Categories of ED:
1.Elastic Demand
2. Inelastic Demand
3. Unit Elastic Demand
|ED| > 1
Elastic
|ED| < 1
Inelastic
|ED| = 1
Unit Elastic
%change in QD > %change in P
Elastic
%change in QD < %change in P
Inelastic
%change in QD = %change in P
Unit Elastic
What is this an example of?
Ex.- A 10% increase in P, 20% decrease in QD
Elastic Demand
What is this an example of?
Ex.- A 10% increase in P, 5% decrease in QD
Inelastic Demand
What is this an example of?
Ex.- A 10% increase in P, 10% decrease in QD
Unit Elastic
ED is especially important to _______ because changes in P affect their Total Revenue.
Producers
Total amount you receive from selling a good or service
Total Revenue
TR = _____ x ______
Price x Quantity
When P increases TR _____
increases
As the P increases, QD decreases, so sell fewer units = TR ______
decreases
What happens to TR when P increases?
Depends on ED
What does TR equal if Tacos cost $2 and you sell 125 of them?
2 x 125 = 250
- Straight line D curve
- Constant slope
- ED varies
Linear Demand Curve
Don’t classify a demand curve as _______.
elastic or inelastic
Don’t confuse slope for _______
Elastic
ED = infinity / small
Perfectly Elastic Demand
Consumers don’t tolerate changes in P, assuming perfect substitutions
Perfectly Elastic Demand
When P changes consumers may not buy at all.
Perfectly Elastic Demand
ED = 0
Perfectly Inelastic Demand
Price is no object, QD does not change when P changes
Perfectly Inelastic Demand
ED = 0 until a certain price
Perfectly Inelastic Demand
Availability of Substitutes = ED is _______
greater; more elastic
- More substitutes available
- More similar the substitutes are
ED is greater (more elastic)
ED is greater (more elastic) depends on ____
how the market is defined (narrow or broad)
Narrow def. = more subs,
so ED is ______
more elastic
Broad def. = less Subs,
so ED is ______
less elastic
What are these examples of?
Ex.- bananas, jeans, chicken, and Ben & Jerry’s
Narrow Def.
What are these examples of?
Ex.- fruit, meat, clothes, ice cream
Broad Def.
If a good is a large part of budget and P increases, ______
More elastic
Necessity = ______
inelastic
Luxury = _____
elastic
longer periods of time = _____
more elastic
If a 5% increase in price leads to an 8% decrease in quantity demanded, demand is _______
elastic
If a firm raises the price of its product, its total revenue will _______
increase only if demand is price inelastic
Demand is elastic whenever price elasticity has an absolute value_______ 1
greater than
A perfectly elastic demand curve is _______.
a horizontal straight line
Consumers have a long time to adjust to a price change which makes the demand _____
more elastic
