Chapter 6 Flashcards
Price elasticity of demand
Percentage change in quantity demanded divided by percentage change in price
Elastic
Greater than 1
Inelastic
Less than 1
Unit-elastic
Equals to 1
Perfectly inelastic
=0, quantity demanded is unresponsive to price (vertical line)
Perfectly elastic
=infinity, quantity demanded is infinitely responsive to price (horizontal line)
Determinants of the price elasticity of demand
Availability of close substitutes for the good, the passage of time, whether the good is a luxury or necessity, definition of market , the share of the good in the consumer’s budget
Total revenue
(price x quantity)
Relationship between price elasticity of demand and total revenue
Inelastic: move in the same direction - Elastic: moves inversely
Cross-price elasticity of demand
Price change in quantity demanded of one good divided by percent change in price of another good
Luxury
A normal good with a quantity demanded that responds more to percent change
Necessity
A normal good with a quantity demanded that responds less to percent change