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Terms in this set (21)
Price Elasticity of Demand
the percent change in the quantity demanded divided by the percent change in the price (dropping the minus sign)—is a measure of the responsiveness of the quantity demanded to changes in the price. In practical calculations, it is usually best to use the midpoint method, which calculates percent changes in prices and quantities based on the average of starting and final values.
Perfectly Inelastic Demand
The quantity demanded is unaffected by price. The demand curve is a vertical line
Perfectly Elastic Demand
There is a unique price where consumers will be as much or as little as they are offered. The demand curve is a horizontal line
The price elasticity of demand is classified according to
whether it is more or less than 1. If it is greater than 1, demand is elastic. If it is less than 1, demand is inelastic.
How does price elasticity of demand affect total revenue?
If demand is elastic, total revenue falls when the price increases and rises when the price decreases. If demand is inelastic, total revenue rises when the price increases and falls when the price decreases
What are variables that affect price elasticity of demand
Whether there are close substitutes for the good in question, whether the good is a necessity or a luxury, the share of income spent on the good, and the length of time that has elapsed since the price change.
Cross Price Elasticity of Demand
measures the effect of a change in one good's price on the quantity of another good demanded.
If cross price elasticity of demand is positive, then the goods are
substitutes
If cross price elasticity of demand is negative, then the goods are
complements
Income elasticity of demand
is the percent change in the quantity of a good demanded when a consumer's income changes divided by the percent change in income.
What does income elasticity of demand indicate?
The income elasticity of demand indicates how intensely the demand for a good responds to changes in income.
If income elasticity of demand for a good is negative, then the good
is an inferior good
If income elasticity of demand for a good is positive, then the good
is a normal good
Income Elastic
If a good has an income elasticity that is greater than 1
Income Inelastic
If a good has an income elasticity that is greater than 0 but less than 1
Price Elasticity of Supply
is the percent change in the quantity of a good supplied divided by the percent change in the price.
Perfectly Inelastic Supply
If the quantity supplied does not change at all due to a change in price. The supply curve is a vertical line.
Perfectly Elastic Supply
If the quantity supplied is zero below some price but infinite above that price. The supply curve is a horizontal line.
The Price elasticity of supply depends on what?
The availability of resources to expand production, and on time. It is higher when inputs are available at relatively low cost and the longer the time elapsed since the price change.
Unit Elastic Demand
When the price elasticity of demand is exactly 1.
As time passes
Elasticity of demand increases
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