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Social Science
Economics
Agricultural Economics
Microeconomics Chapter 6
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Terms in this set (73)
Elasticity
A measure of how much one economic variable responds to changes in another economic variable.
price elasticity of demand
the responsiveness of the quantity demanded of a good to changes in its price
how do you calculate price elasticity of demand
% change in quantity demanded / % change in price
The price elasticity of demand is always negative (T/F)
True
Elastic Demand
the percentage change in the quantity demanded is GREATER the percentage change in price - when price elasticity is GREATER than 1 in absolute value
inelastic demand
the percentage change in quantity demanded is LESS than the percentage change in price - when price elasticity is LESS than 1 in absolute value
unit elastic demand
the percentage change in quantity demanded EQUALS the percentage change in price - when the price elasticity is EQUAL to 1 in absolute value
What happens when the quantity demanded is very responsive to changes in price?
The percentage change in quantity demanded will be
A. unrelated to the percentage change in price.
B. greater than the percentage change in price.
C. equal to the percentage change in price.
D. less than the percentage change in price.
B. greater than the percentage change in price.
midpoint formula price of elasticity of demand
If two demand curves intersect, the following is true
the flatter curve is more elastic
the steeper curve is less elastic
When demand curves intersect, the curve with the larger slope in absolute value (the steeper demand curve) is more elastic. (T/F)
False
perfectly inelastic
when the quantity demanded does not respond at all to changes in the price. When demand is perfectly inelastic, the demand curve is a vertical line and the price elasticity is equal to 0
perfectly elastic
when the quantity demanded is infinitely responsive at all to changes in the price. When demand is perfectly elastic, the demand curve is a horizontal line and the price elasticity is equal to infinity
perfectly elastic demand curve
price elasticity is equal to infinity
perfectly inelastic demand curve
price elasticity is equal to 0
Unit-Elastic Demand Curve
price elasticity is equal to 1
inelastic demand curve
price elasticity is less than 1
elastic demand curve
price elasticity is greater than 1
The more substitutes available for a product, the greater the price elasticity of demand. (T/F)
True
if a product has more substitutes available, it will have a more __________ demand
elastic
if a product has less substitutes available, it will have a more __________ demand
inelastic
the more time that passes, the more _________ the demand for a product becomes
elastic
The more time that passes, the more inelastic the demand for a product becomes. (T/F)
False
the demand curve for a luxury is more _________ than the demand curve for a necessity
elastic
The demand curve for a luxury is less elastic than the demand curve for a necessity. (T/F)
False
the more narrowly we define a market, the more ________ the demand will be
elastic
the demand for a good will be more ________ the larger the share of the good in the average consumer's budget
elastic
In general, the demand for a good will be _________ elastic the ___________ the share of the good in the average consumer's budget.
more; smaller
less; larger
less; smaller
more; larger
less; smaller
Is the demand for agricultural products elastic or inelastic? Why?
The demand for agricultural products is
inelastic because such products represent a small share in the consumer's budget.
what are the key determinants of the price elasticity of demand for a product
availability of close substitutes
passage of time
necessities versus luxuries
definition of the market
share of the good in the consumer's budget.
which determinant is the most important
availability of close substitutes
total revenue
the total amount of funds a seller receives from selling goods or services - price * quantity sold
when demand is inelastic, price and total revenue move in the same direction
an increase in price raises total revenue, and vise versa
when demand is elastic, price and total revenue move in the inverse direction
an increase in price reduces total revenue, and vise versa
Firms often rely on market experiments to calculate the price elasticity of demand for a new product. (T/F)
True
cross-price elasticity of demand
the percentage change in the quantity demanded of one good divided by the percentage change in the price of another good
income elasticity of demand
a measure of the responsiveness of the quantity demanded to changes in income, measured by the percentage change in the quantity demanded divided by the percentage change in income
An increase in the price of a substitute for iPads will lead to a(n) __________ in the quantity of iPads demanded, so the cross-price elasticity of demand will be _________.
increase; positive
increase; negative
decrease; positive
decrease; negative
increase; positive
If the products are substitutes
Then the cross-price elasticity of demand will be Positive
If the products are complements
then the cross-price elasticity of demand will be negative
If the products are unrelated
then the cross-price elasticity of demand will be zero
a good is a normal good if
the quantity of a good increases as income increases
a good is a luxury if
the quantity demanded IS very responsive to changes in income so that a 10% increase in income results in MORE than 10% increase in quantity demanded
a good is a necessity if
the quantity demanded is NOT very responsive to changes in income so that a 10% increase in income results in LESS than 10% increase in quantity demanded
a good is a inferior good if
the quantity of a good decreases as income increases
The income elasticity of demand for a normal good is _____ and for an inferior good is ______.
positive; negative
if income elasticity of demand is negative
then the good is inferior
if income elasticity of demand is positive but less than one
the the good is normal and a necessity
if income elasticity of demand is positive but greater than one
the the good is normal and a luxury
the cross-price elasticity of demand is
the percentage change in quantity demanded of one good divided by the percentage change in the price of another good.
income elasticity of demand is
the percentage change in quantity demanded divided by the percentage change in income.
For a normal good, the income elasticity of demand will be
positive, but for an inferior good, the income elasticity of demand will be negative.
the cross-price elasticity of demand between "substitutes" is most likely _________ and the cross-price elasticities of demand between "complements" is most likely ___________
positive; negative
price elasticity of supply
the responsiveness of the quantity supplied to a change in price, measured by dividing the percentage change in the quantity supplied of a product by the percentage change in the product's price
The price elasticity of supply is always positive (T/F)
True
If the price elasticity of supply is less than 1
supply is inelastic
If the price elasticity of supply is greater than 1
supply is inelastic
If the price elasticity of supply is equal than 1
supply is unit-elastic
For most products, the supply curve becomes increasingly inelastic the longer the period of time over which it is measured. (T/F)
False
If a supply curve is a vertical line, it is ________, and if it is a horizontal line, it is ________.
perfectly inelastic and has an elasticity value of zero; perfectly elastic and has an elasticity value of infinity
When demand increases, equilibrium price will rise ____________ when supply is _________ elastic.
more; less
if supply is elastic then the value of price elasticity is
greater than 1
if supply is inelastic then the value of price elasticity is
less than 1
if supply is unit-elastic then the value of price elasticity is
equal to 1
if supply is perfectly elastic then the value of price elasticity is
equal to infinity
if supply is perfectly inelastic then the value of price elasticity is
equal to 0
The main determinant of elasticity of supply is the
passage of time
Assume that the demand curve for sunblock is linear and downward sloping. Which of the following statements about the slope of the demand curve for sunblock and the price elasticity of demand for sunblock are true?
The slope is constant, but the price elasticity of demand is not constant at all points along the demand curve for sunblock.
A demand curve that is horizontal indicates that the commodity
has a large number of substitutes
Refer to figure 6-7 Between points a and b on the demand curve, demand is
unit-elastic
Economists estimated that the cross-price elasticity of demand for beer and wine is -0.83 and the income elasticity of wine is 5.03. This means that
beer and win are complements and wine is a luxury good
Economists estimated that the price elasticity of beer is -0.30 and the income elasticity of beer is 0.09. This means that
an increase in the price of beer will lead to an increase in revenue for beer sellers and beer is a normal good
Which of the following is one reason why the income of small family farms has decreased over time?
the demand for farm products is price elastic
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