question
elastic
answer
A demand is ______________ when an increase in price reduces the quantity demanded a lot.
question
inelastic
answer
A demand is _______________ when an increase in price reduces quantity demanded just a little.
When demand is this, the price effect dominates the quantity effect.
When demand is this, the price effect dominates the quantity effect.
question
percentage
answer
CALCULATING THE PRICE ELASTICITY OF DEMAND (1 of 2)
Price elasticity of demand = the ________________ change in quantity demanded divided by the percentage change in price.
Price elasticity of demand = the ________________ change in quantity demanded divided by the percentage change in price.
question
-0.5
answer
If the price of oil increases by 10% and the quantity demanded falls by 5%, then the price elasticity of demand for oil is
-5%/10%= ________
-5%/10%= ________
question
starting point
answer
midpoint method
There is a problem: Our percent change calculation depends on our choice of ________________ point.
There is a problem: Our percent change calculation depends on our choice of ________________ point.
question
midpoint
answer
To solve this problem, we calculate the price elasticity of demand using the ______________ formula for percentage changes
% change in X=(Change in X)/(Average Value of X)×100
Average value of X=((Starting Value of X+Final Value of X))/2
% change in X=(Change in X)/(Average Value of X)×100
Average value of X=((Starting Value of X+Final Value of X))/2
question
c.
answer
•If the price of a sushi roll drops from $8 to $4 and sales rise from 20 to 40 units, what is the absolute value of the price elasticity of demand using the midpoint formula?
a)0.5
b)0.66
c)1
2
a)0.5
b)0.66
c)1
2
question
elasticity
answer
Estimating ______________ is crucial to understanding and predicting market outcomes
question
zero, infinity, unit elastic
answer
INTERPRETING THE PRICE ELASTICITY OF DEMAND
•Classification of price elasticity of demand:
•A good can have a price elasticity as low as __________ or as high as __________.
•If a price elasticity < 1, the demand curve is inelastic.
•If a price elasticity > 1, the demand curve is elastic.
If a price elasticity = 1, the demand curve is _______________
•Classification of price elasticity of demand:
•A good can have a price elasticity as low as __________ or as high as __________.
•If a price elasticity < 1, the demand curve is inelastic.
•If a price elasticity > 1, the demand curve is elastic.
If a price elasticity = 1, the demand curve is _______________
question
total revenue
answer
________________ : price times quantity sold.
TR = P × Q
•Sellers need to know how elastic demand is so they can plan.
TR = P × Q
•Sellers need to know how elastic demand is so they can plan.
question
price
answer
When a seller raises the price of a good, there are two countervailing effects:
-A _______________ effect: After a price increase, each unit sells at a higher price, which tends to raise revenue.
-A _______________ effect: After a price increase, each unit sells at a higher price, which tends to raise revenue.
question
quanity
answer
-A ________________ effect: After a price increase, fewer units are sold, which tends to lower revenue.
question
increase
answer
•So an ______________ in price will cause only a slight reduction in the quantity demanded.
•In this instance, total revenue will rise when the price rises (and vice versa).
•In this instance, total revenue will rise when the price rises (and vice versa).
question
elastic
answer
•When demand is ____________, the quantity effect dominates the price effect.
-So an increase in price will cause significant reduction in the quantity demanded.
-In this instance, total revenue will fall when the price rises.
-So an increase in price will cause significant reduction in the quantity demanded.
-In this instance, total revenue will fall when the price rises.
question
unit
answer
•When demand is ________-elastic, the quantity effect equals the price effect.
•So an increase in price exactly balances the reduction in the quantity demanded.
•In this instance, total revenue doesn't change.
•What happens if tire prices go up? TR will not change.
•So an increase in price exactly balances the reduction in the quantity demanded.
•In this instance, total revenue doesn't change.
•What happens if tire prices go up? TR will not change.
question
a
answer
•The elasticity of demand for eggs has been estimated to be 0.1. If egg producers raise their prices by 10%, what will happen to their total revenue?
a) It will increase.
b) It will decrease.
It won't change.
a) It will increase.
b) It will decrease.
It won't change.
question
nesscity, luxury
answer
WHAT FACTORS DETERMINE THE PRICE ELASTICITY OF DEMAND PART 1
1. Whether the good is a ____________ or a ____________:
-For necessities, the quantity demanded does not change much in response to a change in P.
-For luxuries, quantity demanded is more sensitive to a change in price.
1. Whether the good is a ____________ or a ____________:
-For necessities, the quantity demanded does not change much in response to a change in P.
-For luxuries, quantity demanded is more sensitive to a change in price.
question
Q, substitutes
answer
2. The availability of close substitutes:
-Fewer substitutes makes it harder for consumers to adjust _____ when P changes, so demand is inelastic.
-Many _____________ make it easier for consumers to switch brands when prices change, so demand is elastic.
-Fewer substitutes makes it harder for consumers to adjust _____ when P changes, so demand is inelastic.
-Many _____________ make it easier for consumers to switch brands when prices change, so demand is elastic.
question
a
answer
•When the patent expires on a brand-name drug and five generic drugs come on the market, what happens to elasticity of demand for the original drug?
a) It rises.
b) It falls.
a) It rises.
b) It falls.
question
income
answer
WHAT FACTORS DETERMINE THE PRICE ELASTICITY OF DEMAND PART 3
3.The share of __________ spent on the good:
-It feels cheaper when we spend a smaller share of income on the good.
-It feels more expensive when we spend a greater share of income on the good.
3.The share of __________ spent on the good:
-It feels cheaper when we spend a smaller share of income on the good.
-It feels more expensive when we spend a greater share of income on the good.
question
over time
answer
4.Time elapsed since the price change:
-Less time to adjust means lower elasticity.
- __________ ________ consumers can adjust their behavior by finding substitutes (making demand more elastic).
-Less time to adjust means lower elasticity.
- __________ ________ consumers can adjust their behavior by finding substitutes (making demand more elastic).
question
price
answer
•When demand is elastic, the quantity effect dominates the ____________ effect.
-So an increase in price will cause significant reduction in the quantity demanded.
In this instance, total revenue will fall when the price rises
-So an increase in price will cause significant reduction in the quantity demanded.
In this instance, total revenue will fall when the price rises
question
inelastic
answer
APPLICATIONS OF ELASTICITY OF DEMAND
•Why the war on drugs is hard to win:
-Because demand for most illegal drugs is __________________, drug dealers earn greater revenue and gain more power as the war on drugs reduces the supply.
•Why the war on drugs is hard to win:
-Because demand for most illegal drugs is __________________, drug dealers earn greater revenue and gain more power as the war on drugs reduces the supply.
question
cross
answer
OTHER DEMAND ELASTICITIES
•The ____________-price elasticity of demand measures how sensitive the quantity demanded of good A is to the price of good B.
size of thIS elasticity shows how closely substitutable the two goods are.
(% change in quantity of A demanded)/(%change in price of B)
•The ____________-price elasticity of demand measures how sensitive the quantity demanded of good A is to the price of good B.
size of thIS elasticity shows how closely substitutable the two goods are.
(% change in quantity of A demanded)/(%change in price of B)
question
substitutes
answer
•For ___________________, cross-price elasticity of demand is positive.
-An increase in the price of one brand of cookies will increase the demand for other brands.
-An increase in the price of one brand of cookies will increase the demand for other brands.
question
complements
answer
CROSS-PRICE ELASTICITY OF DEMAND
•For _________________, cross-price elasticity of demand is negative.
-An increase in the price of milk causes a decrease in demand for Oreos.
-The size of the cross-price elasticity shows how closely complementary the two goods are.
•For _________________, cross-price elasticity of demand is negative.
-An increase in the price of milk causes a decrease in demand for Oreos.
-The size of the cross-price elasticity shows how closely complementary the two goods are.
question
b
answer
If the price of online movies increases from $6 to $8, total revenue _____, which means that demand is _____.
a. remains constant; elastic
b. decreases; elastic
c. decreases; inelastic
d. increases; elastic
a. remains constant; elastic
b. decreases; elastic
c. decreases; inelastic
d. increases; elastic
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