25 terms

# Economics Chapter 4

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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
3 time frames of supply
momentary
long-run
short-run