Chapter Five

The price elasticity of demand measures how much

quantity demanded responds to a change in price

Demand is said to be price elastic if

buyers respond substantially to changes in the price of the good

Demand is said to be inelastic if

the quantity demanded changes only slightly when the price of the good changes

Demand is elastic if the price elasticity of demand is

greater than one

Demand is inelastic if the price elasticity of demand is

less than one

Goods with many close substitutes tend to have

more elastic demands

For a good that is a luxury, demand

tends to be elastic

For a good that is a necessity, demand

tends to be inelastic

A good will have a more inelastic demand, the

broader the definition of the market

Economists compute the price elasticity of demand as the

percentage change in quantity demanded divided by the percent change in price

If the price elasticity of demand for a good is 2.0, then a 10 percent increase in price results in a

20 percent decrease in the quantity demanded

When demand is perfectly inelastic, the demand curve will be

vertical, because buyers purchase the same amount as before whenever the price rises or falls

Demand is said to have unit elasticity if the price elasticity of demand is

equal to one

When demand is elastic, a decrease in price will cause

an increase in total revenue

When demand is inelastic, an increase in price will cause

an increase in total revenue

When demand is unit elastic, price elasticity of demand equals

1, and total revenue does not change when price changes

Income elasticity of demand measures how

the quantity demanded changes as consumer income changes

If a increase in income results in a decrease in the quantity demanded of a good, then for that good, the

income elasticity of demand is negative

Assume that a 4 percent increase in income results in a 2 percent increase in the quantity demanded of a good. The income elasticity of a demand for the good is

positive, and the good is a normal good

Cross-price elasticity of demand measures how

the quantity demanded of one good changes in response to a change in the price of another good

If two goods are substitutes, their cross-price elasticity will be

positive

If two goods are complements, their cross-price elasticity will be

negative

If the quantity supplied responds only slightly to changes in price, then

supply i said to be inelastic

A key determinant of the price elasticity of supply is the

time horizon

IF the quantity supplied is the same regardless of price, then supply is

perfectly inelastic

Suppose that corn farmers want to increase their total revenue. Knowing that the demand for corn in inelastic, corn farmers should

reduce the number of acre on which they plant corn

Determinants of the Price Elasticity of Demand

Availability of close substitutes necessities versus luxuries definiton of the market time horizon

The flatter the demand curve that passes through a given point, the

greater the price elasticity of demand

If the demand is inelastic, then an increase in price causes

an increase in total revenue

When demand is inelastic (a price elasticity less than 1)

price and total revenue move in the same direction

When demand is elastic (a price elasticity greater than 1)

price and total revenue move in opposite directions

If demand is unit elastic (a price elasticity exactly equal to 1)

total revenue remains constant when the price changes

At points with a low price and high quantity,

the demand curve is inelastic

Chapter Five - Subjecto.com

Chapter Five

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The price elasticity of demand measures how much

quantity demanded responds to a change in price

Demand is said to be price elastic if

buyers respond substantially to changes in the price of the good

Demand is said to be inelastic if

the quantity demanded changes only slightly when the price of the good changes

Demand is elastic if the price elasticity of demand is

greater than one

Demand is inelastic if the price elasticity of demand is

less than one

Goods with many close substitutes tend to have

more elastic demands

For a good that is a luxury, demand

tends to be elastic

For a good that is a necessity, demand

tends to be inelastic

A good will have a more inelastic demand, the

broader the definition of the market

Economists compute the price elasticity of demand as the

percentage change in quantity demanded divided by the percent change in price

If the price elasticity of demand for a good is 2.0, then a 10 percent increase in price results in a

20 percent decrease in the quantity demanded

When demand is perfectly inelastic, the demand curve will be

vertical, because buyers purchase the same amount as before whenever the price rises or falls

Demand is said to have unit elasticity if the price elasticity of demand is

equal to one

When demand is elastic, a decrease in price will cause

an increase in total revenue

When demand is inelastic, an increase in price will cause

an increase in total revenue

When demand is unit elastic, price elasticity of demand equals

1, and total revenue does not change when price changes

Income elasticity of demand measures how

the quantity demanded changes as consumer income changes

If a increase in income results in a decrease in the quantity demanded of a good, then for that good, the

income elasticity of demand is negative

Assume that a 4 percent increase in income results in a 2 percent increase in the quantity demanded of a good. The income elasticity of a demand for the good is

positive, and the good is a normal good

Cross-price elasticity of demand measures how

the quantity demanded of one good changes in response to a change in the price of another good

If two goods are substitutes, their cross-price elasticity will be

positive

If two goods are complements, their cross-price elasticity will be

negative

If the quantity supplied responds only slightly to changes in price, then

supply i said to be inelastic

A key determinant of the price elasticity of supply is the

time horizon

IF the quantity supplied is the same regardless of price, then supply is

perfectly inelastic

Suppose that corn farmers want to increase their total revenue. Knowing that the demand for corn in inelastic, corn farmers should

reduce the number of acre on which they plant corn

Determinants of the Price Elasticity of Demand

Availability of close substitutes necessities versus luxuries definiton of the market time horizon

The flatter the demand curve that passes through a given point, the

greater the price elasticity of demand

If the demand is inelastic, then an increase in price causes

an increase in total revenue

When demand is inelastic (a price elasticity less than 1)

price and total revenue move in the same direction

When demand is elastic (a price elasticity greater than 1)

price and total revenue move in opposite directions

If demand is unit elastic (a price elasticity exactly equal to 1)

total revenue remains constant when the price changes

At points with a low price and high quantity,

the demand curve is inelastic

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