Lecture 6

Question 1

formula for percentage increase

Answer 1

new-old/old

Question 2

what does the midpoint method tell you?

Answer 2

Calculate elasticity estimates

Question 3

formula for price elasticity of demand

Answer 3

% change in quantity demanded/ % change in price

( use average prices for both quantity and price so the value remains consistent.)

Question 4

Factors that influence the price elasticity of demand

Answer 4

-closeness of substitutes
-the proportion of income spent on the good. (gum example)
-time elapsed since a price change (more inelastic right after a price change, but the longer prices are high the more responsive)

Question 5

describe closeness of substitutes

Answer 5

-the closer the substitutes for a good or service, the more elastic the demand for that good.

housing & food= inelastic demand
Luxuries/vacations=elastic demand

Question 6

Describe proportion of income spent on the good

Answer 6

The greater the proportion of income consumers spend on a good, the larger the elasticity of demand for that good.

Question 7

describe time elapsed since price change

Answer 7

The more time consumers have to adjust to a price change, the more elastic is the demand for that good.

Question 8

elasticity along a LINEAR demand curve

Answer 8

a the mid-point of the demand curve, demand is unit elastic

Question 9

Total revenue and elasticity

Answer 9

total revenue from a sale of good/service = price of the good x quantity sold

TR= P x Q

Question 10

If demand is elastic what happens to price and revenue

Answer 10

Prices: decreases
Quantity: Increases
Total revenue: increases

Question 11

If demand is unit elastic what happens to price and revenue?

Answer 11

price: decreases
quantity: increases
Total revenue: unchanged

Question 12

if demand is inelastic what happens to price and total revenue?

Answer 12

price: decreases
quantity: increases
total revenue: decreases

Question 13

When price elasticity of demand is perfectly elastic… what is magnitude & what does this mean (table)

Answer 13

Magnitude: infinity
The smallest possible increase in price causes an infinitely large decrease in the quantity demanded.

Question 14

When price elasticity of demand is elastic… what is magnitude & what does this mean (table)

Answer 14

Magnitude: less than infinity but greater than 1
the percentage decrease in the quantity demanded exceeds the percentage increase in price.

Question 15

When price elasticity of demand is unit elastic… what is magnitude & what does this mean (table)

Answer 15

Magnitude: 1
The percentage decrease in the quantity demanded equals the percentage increase in price.

Question 16

When price elasticity of demand is inelastic… what is magnitude & what does this mean (table)

Answer 16

Magnitude: less than one but greater than 0
The percentage decrease in the quantity demanded is less than the percentage increase in price.

Question 17

When price elasticity of demand is perfectly inelastic… what is magnitude & what does this mean (table)

Answer 17

magnitude: zero
the quantity demanded is the same at all prices