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Micro: Chapter 6
Test 2
| Term | Definition |
|---|---|
| price elasticity of demand | sensitivity of the quantity of a good to the price it's being sold at; % change in quantity demanded / % change in price; always negative |
| How to interpret elasticity = -2.5 | If price goes down 1%, quantity will go up by 2.5% |
| Elastic | E > 1; for every 1% change in P, there is greater than 1% change in quantity demanded; more sensitive to price |
| Inelastic | E < 1; for every 1% change in P, there is less than 1% change in quantity demanded; less sensitive to price |
| unit elastic | E = 1 |
| perfectly inelastic demand | demand that has no response to price; % change in quantity demand is zero for any price; vertical line; ex: insulin |
| perfectly elastic demand | demand that is super sensitive to price; horizontal line; ex: dollar coin |
| factors that influence price elasticity of demand | substitutes; necessity/luxury; share of income spent on good; short vs. long run |
| availability of substitutes | the more substitutes, the more elastic demand is (why? easier to replace, so more sensitive to price) |
| necessity or luxury | necessities are less sensitive to price, so elasticity is low (relatively more inelastic); luxuries are more sensitive to price, so elasticity is higher (relatively more elastic) |
| share of income spent on the good | smaller parts of income are less sensitive and therefore less elastic; larger parts of income are more sensitive to prices and therefore more elastic |
| short vs. low run | price elasticity of demand tends to increase (more sensitive to price) as consumers have more time to adjust to a price change; short term more inelastic than long term |
| elasticity across the demand curve | w/linear demand curve, moving down (lower and lower price) the demand curve means your elasticity decreases; above equilibrium = elastic; at equilibrium = unit elastic; below equilibrium = inelastic |
| total revenue | total value of sales of a good; R = price * quantity sold; crucial for asking whether a price rise will increase or decrease total revenue |
| price effect | raising prices means that each unit will be sold at a higher price, which tends to raise revenue (prices up = revenue up) |
| quantity effect | raising prices mean that fewer units are sold, which tends to lower revenue (prices up = quantity down = revenue down) |
| total effect when price rises... inelastic | If demand is inelastic (E<1), the price effect dominates and total revenue goes up when price is raised; price and revenue effects parallel; this occurs on the demand curve below equilibrium and rising up towards it |
| total effect when price rises... elastic | If demand is elastic (E>1), the quantity effect dominates and total revenue goes down when price is raised; price and revenue effects are opposite; occurs above equilibrium on demand curve (and sliding up away from equalibrium) |
| price/quantity effect and elastic/inelastic on the demand curve | above equilibrium = elastic, lowering prices raises revenue; below equilibrium = inelastic, raising prices raises revenue |
| cross-price elasticity of demand | deals with substitutes/compliments; % change in quantity demanded of good A / % change in price of good B |
| substitutes and cross-price elasticity | positive number: rise in price of good B = rise in quantity of good A; how closely substitutable are they? close subs = large #; distant subs = small # |
| complements and cross-price elasticity | negative number; rise in price of good B = drop in quantity of good A; how strong of a complement are they? strong comps = far from zero; weak comps = close to zero |
| income elasticity of demand | measure of change in demand of good based on changes in income; so about income changes and normal/inferior goods; % change in quantity demanded / % change in income |
| normal goods and income elasticity | IED is positive number; quantity demanded increases when income increases |
| inferior goods and income elasticity | IED is a negative number; quantity demanded drops when income increases |
| income-elastic | NORMAL GOODS ONLY; IED > 1; demand rises faster than income; luxury goods |
| income-inelastic | NORMAL GOODS ONLY; IED<1; income rises faster than demand; necessity goods |
| price elasticity of supply | always positive; basically the same concept as w/demand; % change in quantity supplied / % change in price |
| perfectly inelastic supply | changes in the price of the good have no effect on the quantity supplied; elasticity is 0; vertical line |
| perfectly elastic supply | changes in price will lead to very large changes in quantity supplied; elasticity is approaching infinity; horizontal line |
| factors that influence price elasticity of supply | availability of inputs, time |
| availability of inputs | elasticity large when inputs are readily available (shifted in/out of production at low cost); small when inputs are difficult to obtain |
| time | price elasticity of supply tends to grow larger as producers have more time to respond to a price change; same as w/price elasticity of demand |
Created by:
nicook
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