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31 Cards in this Set

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price elasticity of demand

% change in quantity demanded/% change in price

what does a large value for price elasticity mean

quantity demanded changes by a lot in response to price change

price elastic

when price elasticity of demand is greater than 1

price inelastic

when price elasticity of demand is smaller than 1

unit price elastic

when price of elasticity of demand =1

you can calculate percent change by using the midpoint formula

(A-B)/((A+B)/2)

price elasticity of demand formula

(Q2-Q1)/((Q2+Q1)/2) / (P2-P1)/((P1+P2)/2)

the higher the slope the more elastic it is

TRUE

what does a vertical demand curve represent

elasticity is 0 = perfectly inelastic

what does a horizontal demand curve represent

elasticity is infinite= perfectly elastic

what determines the price elasticity of demand

1. availability of close substitutes: more substitutes more elastic demand


2. passage of time: elasticity is higher in the long run than in the short run


3. whether the good is a luxury or a necessity: price elasticity is high for luxuries


4. the definition of the market: the more narrowly defined market the more elastic


5. the share of a good in a consumer budget: small elasticity, small portion of your budget is not sensitive to price

total revenue

the total amount of funds received by a seller of a good or service, calculated by multiplying the price per unit by the number of units sold

what happens to total revenue when you decrease the price of a good with inelastic demand

total revenue goes dow

what happens to total revenue when you decrease the price of a good with an elastic demand

total revenue goes up

special case:


what occurs when the price elasticity of demand is -1.

% change in quantity demanded= % change in price thus no change in revenue

as price goes up and revenue goes up

demand is inelastic

as price goes up and revenue goes down

demand is elastic

what do firms use to calculate price elasticity of demand for a new product

market experiments

cross price elasticity of demand

measures the strength of a substitute or complement relationships between goods

formula for cross price elasticity

% change in quantity demanded of one good / % change in price of another good

if the products are substitutes then the cross price elasticity will be

postive

if the products are complements then the price elasticity will be

negative

if the product are unrelated then the price elasticity will be

zero

income elasticity of demand

measures the strength of the effect of income on quantity demanded

formula for income elasticity of demand

% change in quantity demanded / % change in income

if income elasticity of demand is pos and greater than 1

normal and a luxury


Ex: caviar

if income elasticity is pos and less than 1

normal and a necessity


Ex: bread

if income elasticity is neg

inferior


Ex: ramen noodles

necessity

a normal good with a quantity demanded that responds less than proportionally to a price change

luxury

a normal good with a quantity demanded that responds more than proportionally to a price change

price elasticity pf supplied formula

% change in quantity supplied / % change in price