Chapter 4 - Price and Elasticity of Demand Flashcards
(17 cards)
The more elastic demand is, the _____ that a product can be marked up (sold at a price above its marginal cost).
less
Total Revenue is equivalent to _____ multiplied by _____.
price; quantity (produced)
Price and Quantity Demanded have an _____ relationship.
inverse
When one goes up, the other goes down.
Elasticity of Demand
A measure of how sensitive Quantity Demanded is to a change in Price.
The Elasticity of Demand Coefficient (ε)
A coefficient that describes the elasticity of demand:
% Change in Quantity Demanded
ε = ————————————————
% Change in Price
If the absolute value of the elasticity of demand coefficient ( |ε| ) is less than 1, demand is _____.
inelastic
If |ε| < 1, demand is inelastic, meaning quantity demanded is relatively undisturbed by changes in price. Examples of inelastic goods include insulin and gasoline.
If the absolute value of the elasticity of demand coefficient ( |ε| ) is greater than 1, demand is _____.
elastic
If |ε| > 1, demand is elastic, meaning quantity demanded is significantly affected by changes in price. Examples of elastic goods include luxury items.
If the absolute value of the elasticity of demand coefficient ( |ε| ) is equal to 1, demand is _____.
unit elastic
If |ε| = 1, demand is unit elastic, meaning quantity demanded is affected 1-for-1 with a change in price.
One way to think of elasticity is . . .
Consider a rubberband labeled “Quantity Demanded” and a finger labeled “Price”. When Price moves up and down against Quantity Demanded, does Quantity Demanded fluctuate or move a lot – like a new and elastic rubberband – or remain stubbornly in place, like an old and inelastic rubberband.
If demand is price elastic, a _____ % change in _____ leads to a _____ % change in _____.
small; Price; big; Quantity Demanded
If demand is price elastic, Marginal Revenue (when quantity demanded rises from a lowered price) is _____.
positive
If demand is price elastic, Total Revenue (P×Q) rises when ____________ and/or __________.
price decreases;
quantity demanded increases
If demand is price inelastic, a _____ % change in _____ leads to a _____ % change in _____.
big; Price; small; Quantity Demanded
If demand is price inelastic, Marginal Revenue (when quantity demanded rises from a lowered price) is _____.
negative
If demand is price inelastic, a price cut _____ _____ and _____ _____.
increases quantity demanded;
decreases total revenue
If demand is price inelastic, a price hike _____ _____ and _____ _____.
lowers quantity demanded;
increases total revenue
