Chapter 3 Flashcards
(21 cards)
A measure of the sensitivity of a dependent variable to a change in an independent variable, given by the ratio of the percentage change in a dependent variable to the percentage change in an independent variable.
What is elasticity?
The sensitivity of quantity demanded to a change in price, given by the ratio of the percentage change in quantity demanded to the percentage change in price.
What does price elasticity of demand (E$_p$) measure?
A measure of the average elasticity over a given price range, used when there are discrete changes in price and quantity.
What is the arc price elasticity of demand?
A measure of the elasticity at a given point on a demand curve, appropriate for very small or infinitesimal changes in price and quantity.
Define point price elasticity of demand (E$_p$).
A situation where quantity demanded does not change in response to a change in price (E$_p$ = 0).
What is perfectly inelastic demand?
A situation where an infinitesimal change in price results in an infinite change in quantity demanded (E$_p$ = -∞).
What characterizes perfectly elastic demand?
A situation where the percentage change in quantity demanded is equal to the percentage change in price (E$_p$ = -1).
What does unitary elastic demand mean?
A situation where the percentage change in quantity demanded is greater than the percentage change in price (E$_p$ < -1 or |E$_p$| > 1).
Define elastic demand.
A situation where the percentage change in quantity demanded is less than the percentage change in price (-1 < E$_p$ < 0 or |E$_p$| < 1).
What is inelastic demand?
The total amount of money received by a firm from the sale of its goods or services.
What is total revenue (TR)?
A pricing strategy that increases total revenue.
What is a revenue enhancing strategy?
A pricing strategy that decreases total revenue.
What does revenue reducing mean?
A pricing strategy that leaves total revenue unchanged.
What is a revenue neutral strategy?
The sensitivity of demand to a change in consumers’ money income, given by the ratio of the percentage change in quantity demanded to the percentage change in income.
Define income elasticity of demand (E$_I$).
Goods for which demand increases as consumers’ money income increases (E$_I$ > 0).
What are normal goods?
Goods for which demand decreases as consumers’ money income increases (E$_I$ < 0).
Define inferior goods.
The sensitivity of the quantity demanded of one good to a change in the price of another good.
What is cross-price elasticity of demand (E$_{XY}$)?
Products for which an increase in the price of one leads to an increase in the demand for the other (E$_{XY}$ > 0).
What are substitutes in the context of elasticity?
Products that are consumed together, so an increase in the price of one leads to a decrease in the demand for the other (E$_{XY}$ < 0).
Define complements in terms of elasticity.
The sensitivity of demand to a change in advertising expenditures, given by the ratio of the percentage change in quantity demanded to the percentage change in advertising.
What is advertising elasticity of demand (E$_A$)?
The sensitivity of quantity supplied to a change in price, given by the ratio of the percentage change in quantity supplied to the percentage change in price.
Define price elasticity of supply (E$_s$).
