question

what does price elasticity of demand measure?

answer

the responsiveness of quantity demanded of a good to a change in its price

question

how do I find price elasticity of demand?

answer

divide percent change in quantity demanded by percent change in price

PEd = %∆Qd / %∆P

use the midpoint method to calculate percents:

(∆Q/Qavg) / (∆P/Pavg)

PEd = %∆Qd / %∆P

use the midpoint method to calculate percents:

(∆Q/Qavg) / (∆P/Pavg)

question

what is the basic form of the midpoint method for calculating percent changes?

answer

100% × (final value - initial value) / midpoint

but in all the calculations we are doing, the 100% will cancel out

but in all the calculations we are doing, the 100% will cancel out

question

is price elasticity of demand negative or positive?

answer

it will always come out negative, so just take the absolute value

question

what is inelastic demand?

answer

the percent change in quantity demanded is less than the percent change in price

1 > PEd > 0

demand curve is bowed inward and quite steep

1 > PEd > 0

demand curve is bowed inward and quite steep

question

what is perfectly inelastic demand?

answer

the quantity demanded is constant regardless of price

PEd = 0

demand curve is a vertical line

PEd = 0

demand curve is a vertical line

question

what is unit elastic demand?

answer

the percent change in quantity demanded equals the percent change in price

PEd = 1

demand is bowed inward; not too steep, not too straight

PEd = 1

demand is bowed inward; not too steep, not too straight

question

what is elastic demand?

answer

the percent change in the quantity demanded is greater than the percent change in price

PEd > 1

demand curve is bowed inward and not very steep

PEd > 1

demand curve is bowed inward and not very steep

question

what is perfectly elastic demand?

answer

the quantity demanded changes by an infinitely large percent to a tiny change in price

PEd = ∞

demand curve is a horizontal line

PEd = ∞

demand curve is a horizontal line

question

is elasticity the same as slope?

answer

NO

question

what is the price elasticity of a linear demand curve?

answer

at the midpoint, demand is unit elastic

above the midpoint, demand is elastic

below the midpoint, demand is inelastic

above the midpoint, demand is elastic

below the midpoint, demand is inelastic

question

what is total revenue?

answer

the price of a good × the quantity sold

question

what is the easiest way to find total revenue?

answer

it should be the area of the square formed by P*

and Q*

and Q*

question

what effect does a 1% price cut have on total revenue when demand is elastic?

answer

total revenue increases

question

what effect does a 1% price cut have on total revenue when demand is inelastic?

answer

total revenue decreases

question

what effect does a 1% price cut have on total revenue when demand is unit elastic?

answer

total revenue stays the same

question

what is price discrimination?

answer

charging less to people with elastic demands in order to increase total revenue

question

what is the relationship between the closeness of substitutes and elasticity of demand?

answer

the closer the substitutes, the more elastic the demand

question

what is the relationship between the portion of income spent on a good and elasticity of demand?

answer

the more expensive the good, the more elastic the demand

question

what is the relationship between the time elapsed since a price change and elasticity of demand?

answer

the longer the time elapsed since a price change, the more elastic the demand

question

what does cross-elasticity of demand measure?

answer

the responsiveness of demand for a good to a change in the price of a substitute or complement

question

how do I find cross-elasticity of demand?

answer

%∆Qd / %∆P of substitute or complement

(∆Q/Qavg) / (∆P/Pavg)

(∆Q/Qavg) / (∆P/Pavg)

question

is cross-elasticity of demand positive or negative?

answer

positive for a substitute and negative for a complement

question

what does income elasticity of demand measure?

answer

the responsiveness of demand for a good to a change in income

question

how do I find income elasticity of demand?

answer

%∆Qd / %∆income

(∆Q/Qavg) / (∆income/avgincome)

(∆Q/Qavg) / (∆income/avgincome)

question

is a normal good income elastic or income inelastic?

answer

BOTH

elastic if IEd > 1

inelastic if 0 < IEd < 1

elastic if IEd > 1

inelastic if 0 < IEd < 1

question

is an inferior good income elastic or income inelastic?

answer

neither (?????)

IEd is negative

IEd is negative

question

what does elasticity of supply measure?

answer

the responsiveness of the quantity supplied of a good to a change in price

question

how do I find elasticity of supply?

answer

%∆Qs / %∆P

(∆Q/Qavg) / (∆P/Pavg)

(∆Q/Qavg) / (∆P/Pavg)

question

what is perfectly inelastic supply?

answer

the quantity supplied is constant regardless of price

PEs = 0

supply curve is a vertical line

PEs = 0

supply curve is a vertical line

question

what is unit elastic supply?

answer

the percent change in quantity supplied equals the percent change in price

PEs = 1

supply curve is a straight line of any slope that begins at the origin

PEs = 1

supply curve is a straight line of any slope that begins at the origin

question

what is perfectly elastic supply?

answer

the quantity supplid changes by an infinitely large percent to a tiny change in price

PEs = ∞

supply curve is a horizontal line

PEs = ∞

supply curve is a horizontal line

question

if a good is produced with commonly available resources, what its elasticity of supply?

answer

very high

because the resources are being allocated to it instead of to something else made from the same resources

(if this is confusing read pg 95 paragraph 3)

because the resources are being allocated to it instead of to something else made from the same resources

(if this is confusing read pg 95 paragraph 3)

question

how can short-run supply be altered?

answer

through small moves like laying off or hiring workers

therefore, short-run supply is usually inelastic

therefore, short-run supply is usually inelastic

question

how can long-run supply be altered?

answer

through big moves like planting more trees

therefore, long-run supply is usually elastic

therefore, long-run supply is usually elastic

question

table on pg 97

answer

...