# 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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