Chapter 6 Flashcards
(31 cards)
Price elasticity of demand
Measures the responsiveness of quantity demanded to changes in price
to know the size of demand
Price elasticity of supply
Measures the responsiveness of quantity supplied to changes in price
- The degree of price elasticity of supply depends on how easily and quickly producers can shift resources between alternative uses
Shift-ability
Shifting resources takes time: the longer the time, the greater the resource shift-ability
the longer a firm has to adjust to a price change; the greater elasticity of supply
Modest price changes cause large changes in quantity demanded:
Demand is relatively elastic
consumers are highly responsive to price changes
Consumers are more flexible in their reaction to a price change
Substantial price changes cause small changes in quantity demanded:
Demand is relatively inelastic
consumers pay less attention to price changes.
Consumers are less flexible in their reaction to a price change
Modest price changes cause large changes in quantity supplied:
Supply is relatively elastic
suppliers are highly responsive to price changes
suppliers are more flexible in their reaction to a price change
The price elasticity of supply is always:
The price elasticity coefficient of supply (Es) will always be positive
Because price and quantity supplied are directly related
Substantial price changes cause small changes in quantity supplied:
Supply is relatively inelastic
Suppliers pay less attention to price changes.
Suppliers are less flexible in their reaction to a price change
Why use percentages in measuring consumer responsiveness?
- The use of absolute values will arbitrarily affect our impression of buyer responsiveness
- By using percentages, we can correctly compare consumer responsiveness among various products
Elimination of minus sign
The price elasticity coefficient of demand (Ed) will always be a negative number
(leave out minus sign)
Because price and quantity demanded are inversely related
Perfectly inelastic
Ed = 0
A price change results in no change in the quantity demanded
Shown as a vertical line
Perfectly elastic
Ed = ∞
A price reduction causes buyers to increase their purchases from zero to all they can obtain
from 0 to infinity
Shown as a horizontal line.
Price above line; Quantity is zero.
Price below line; Quantity is infinite
Unit elasticity
Ed = 1
Percentage change in price = Percentage change in quantity demanded
Inelastic demand
Ed less than 1
A percentage change in price produces a smaller percentage change in quantity demanded
Ed < 1
Elastic demand
Ed greater than 1
A percentage change in price produces a larger percentage change in quantity demanded
Ed > 1
Total Revenue
TR = P x Q
Product price (P) multiplied by the quantity demanded (Qd)
The total amount the seller receives from the sale of a product in a particular time period
Total Revenue Test
what happens to TR
- TR changes in opposite direction from the price: demand is elastic
- TR changes in the same direction as price: demand is inelastic
- TR does not change when price changes: demand is unit-elastic
how elasticities of demand influence TR in response to price change
Total revenue test
Elastic Demand
- Ed > 1:
- The percentage change in quantity demanded is greater than the percentage change in price
- Decrease in price will increase total revenue; Increase in price will decrease total revenue
Ed > 1: %ΔQ > %ΔP
When price and total revenue move in opposite directions, demand is elastic
Total revenue test
Inelastic demand
- Ed < 1
- The percentage change in quantity demanded is less than the percentage change in price.
- Increase in price will increase total revenue; Decrease in price will decrease total revenue
Ed < 1: %ΔQ<%ΔP
When price and total revenue move in the same direction, demand is inelastic
Total revenue test
Unit elasticity
- Ed = 1:
- the percentage change in quantity = the percentage change in price
- An increase or decrease in price leaves total revenue unchanged
Ed = 1: %ΔQ=%ΔP
When price changes and total revenue remains constant, demand is unit elastic
Determinents of price elasticity of demand
- Subsitutability:
the higher the number of substitute goods available, the greater Ed - Proportion of income:
the higher the price of a good relative to consumer income, the greater Ed - Luxuries versus necessities:
the more a good is considered to be a luxury rather than necessity, the greater Ed - Time
product demand is more elastic the longer the time period
- consumers need time to adjust to price changes
- product durability
The Market Period
The time immediately after a change in market price is too short for producers to respond with a change in quantity supplied
Immediate market period: not enough time to shift resources
Es = 0; Perfectly inelastic
The Short Run
Plant capacity is fixed, but changing the intensity of its use can alter output
Resources are not easily shifted to alternative uses
Es < 1; Inelastic supply
The Long Run
All desired adjustments can be made
Resources are easily shifted to alternative uses
E > 1; Relatively elastic
