Macroeconomics - Ch 4

Question 1

Price Elasticity of Demand

Answer 1

Measure of the responsiveness or sensitivity of consumers to a price change

Question 2

Relatively elastic (elastic)

Answer 2

modest price changes cause very large changes in the quantity purchased; Ed > 1

Question 3

Relatively inelastic (inelastic)

Answer 3

Substantial price changes cause only small changes in the amount purchased; Ed < 1

Question 4

Price Elasticity Coefficient Formula

Answer 4

Ed = % change in qty of product x/% change in price of product x (change in qty demanded of x/original qty demanded of x divided by change in price of x/original price of x)

Question 5

Midpoint formula

Answer 5

Ed = change in qty/sum of quantities/2 divided by change in price/sum of prices/2

Question 6

Unit elasticity

Answer 6

percentage change in price and the resulting percentage change in qty demanded are the same; Ed = exactly 1

Question 7

Perfectly inelastic

Answer 7

where a price change results in no change whatsoever in the quantity demanded; price elasticity coefficient is zero because there is no response to a change in price; graphically = vertical line

Question 8

Perfectly elastic

Answer 8

where a small price reduction causes buyers to increase their purchases from zero to all they can obtain, the elasticity coefficient is infinite; graphically = horizontal line

Question 9

Total Revenue (TR)

Answer 9

total amount the seller receives from the sale of a product in a particular time period; TR = P (Price) x Q (quantity sold)

Question 10

Total Revenue Test

Answer 10

If total revenue changes in the opposite direction from price, demand is elastic; if total revenue does not change when price changes, demand is unit-elastic (unitary)

Question 11

Determinants of price elasticity of demand

Answer 11

demand is more elastic the longer the time period under consideration); product durability

Question 12

Price Elasticity of Supply (Es)

Answer 12

% change in qty supplied of product x/% change in price of product x; degree of elasticity depends on how easily and quickly producers can shift resources between alternative uses; the easily and more rapidly the shift, the greater the elasticity of supply

Question 13

Market period

Answer 13

Period that occurs when the time immediately after a change in market price is too short for producers to respond with a change in quantity supplied

Question 14

Short run

Answer 14

period of time too short to change plant capacity but long enough to use the fixed-sized plant more or less intensely; equilibrium price is lower in the short run than in the market period

Question 15

Long run

Answer 15

time period long enough for firms to adjust their plant sizes and for new firms to enter (or existing firms to leave) the industry

Question 16

Price discrimination

Answer 16

charging different prices to different customers for the same product (ex.movie tickets)

Question 17

Cross elasticity of demand

Answer 17

measures how sensitive consumer purchases of one product (x) are to a change in the price of some other product (y); Exy = % change in qty demanded of product x/% change in price of product y; can be positive or negative

Question 18

Income elasticity of demand

Answer 18

measures the degree to which consumers respond to a change in their incomes by buying more or less of a particular good; Ei = % change in qty demanded/% change in income

Question 19

Positive cross elasticity

Answer 19

quantity demanded changes in same direction as change in price (substitutes)

Question 20

Negative cross elasticity

Answer 20

quantity demanded changes in opposite direction from change in price (complements)

Question 21

Positive income elasticity

Answer 21

quantity demanded changes in same direction as change in income (normal/superior goods)

Question 22

Negative income elasticity

Answer 22

quantity demanded changes in opposite direction from change in income (inferior goods)