# Economics Chapter 4

### 25 terms by AllieMartin

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### Price Elasticity of Demand

A units free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buying plans remain the same

### Price Elasticity of Demand Equation

percentage change in quantity demanded/ percentage change in price

### Perfectly Inelastic Demand

If the quantity demanded remains constant then the price elasticity of demand is zero

### Unit Elastic Demand

The percentage change in the quantity demanded equa the percentage change in the price, and then the price elasticity equals 1

### Inelastic Demand

The price elasticity of demand is between zero and 1

### Perfectly Elastic Demand

If the quantity demanded changes by the infinitely large percentage in response to a tiny price change,then the price elasticity of demand is infinite

### Elastic Demand

The price elasticity of a demand is greater than 1

### Total Revenue

The sale of a good equals the price of the good multiplied by the quantity sold

### Change in total revenue depends on the elasticity of demand

- if demand is elastic, 1 percent price cut increases the quantity sold by more than 1 percent and total revenue increases
- if demand is inelastic; a 1 percent price cut increases the quantitiy sold by less than 1 percent and total revenue decreases
- if demand is unit elastic; a 1 percent price cut increases the quantity sold by 1 percent and total revenue does not change

### Total Revenue Test

Method of estimating the price elasticity of demand by observing the change in total revenue that results from a change in the price when all quantities remain the same

### Method of estimating the price elasticity of demand by observing the change in total revenue that results from a change in the price when all quantities remain the same

- price cut increases total revenue; demand is elastic
- price cut decreases total revenue; demand is inelastic
- price cut leaves total revenue unchanged; demand is unit elastic

### The elasticity of demand for a good depends on

- closeness of substitution
- proportion of income spent on the good
- time elapsed since the price change

### Cross Elasticity of Demand

Measure of the responsiveness of the demand for a good to change in the price of a substitute or complement; other things remaining the same

### Cross Elasticity of Demand formula

percentage change in quantity demanded/ percentage change in price or substitute or complement

### Two items are close substitutes...

cross elasticity is large

### Two items are somewhat unrelated...

cross elasticity is small even zero

### Income Elasticity of Demand

A measure of the responsiveness of the demand for a good or service to a change in income, other things remain the same

### Income Elasticity of Demand Formula

percentage change in quantity demanded/percentage change in income

### Income elasticities of demand can be positive or negative and fall into 3 ranges

1. greater than 1
2. positive and less than 1
3. negative

### When the demand for a good is income elastic...

The percentage of income spent on that good increases as income increases

### When the demand for a good is income inelastic...

The percentage of income spent on that good decreases as income increases

### Elasticity of Supply

Measures the responsiveness of the quantity supplied to change in the price of a good when all other influences on selling plans remain the same

### Elasticity of Supply Formula

percentage change in quantity supplied/ percentage change in price

### The elasticity of supply of a good depends on

resource substitution possibilities
time frame for the supply decision

momentary
long-run
short-run

Example: