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econ chapter 5 – elasticity: measuring responsive

question
price elasticity of demand
answer
measure how responsive buyers are to price changes
specifically, it measure by what percent the quantity demanded will change in response to a 1% price change
the responsiveness is measured by the ratio of the percent change in price as you move along the demand curve

= percent change in quantity demanded / percent change in price

use absolute value to focus on the magnitude (because we are comparing percent change)
question
elastic
answer
when the absolute value of the percent change in quantity is larger than the absolute value of the percent change in price, which means that the absolute value of the price elasticity is greater than 1

when demand is ?, price increases also lead to large changes in the quantity demanded

the ? demand curve is relatively flat
question
inelastic
answer
when the absolute value of the percent change in quantity in smaller than absolute value of the percent change in price, which means that the absolute value of the price elasticity is less than 1

when quantity is unresponsive, demand is ?

the ? demand curve is relatively steep
question
unit elastic
answer
when the absolute value of the price elasticity of demand is exactly equal to 1 it is neither elastic nor elastic
question
perfectly elastic
answer
when any change in price leads to an infinitely large change in quantity
horizontal demand curve
question
perfectly inelastic
answer
when quantity does not respond at all to a price change
vertical demand curve
question
price elasticity demand reflects the availability of substitutes
answer
elasticity is all about substitutability. price elasticity demand is larger when:
1) when there are more competing products
2) for specific brands rather than broad categories
3) for things that aren't necessities
4) when consumers search more
5) when there's more time to adjust
question
total revenue
answer
the total amount you receive from buyers, which equals price times quantity
question
less total revenue
answer
higher prices lead to ? if demand is elastic
question
more total revenue
answer
higher prices lead to ? if demand is inelastic
question
raise your prices
answer
if demand for your product is currently inelastic, you should
question
cross price elasticity of demand
answer
measures how responsive the quantity demanded of one good is to price changes of another
specifically, it measures the percent change in the quantity demanded following a 1% change in the price of another good
we measure this as the ratio of the percent change in quantity demanded to the percent change in the price of another good

it is positive for substitutes and negative for complements
it is near zero for independent goods
question
income elasticity of demand
answer
measures how responsive your demand for a good is to changes in your income
specifically, it measures by what percent the quantity demanded will change following a 1% change in income
we measure this as the ratio of the percent change in quantity demanded to the percent change in income

is positive for normal goods and negative for inferior goods
question
price elasticity of supply
answer
measures how responsive sellers are to price changes
specifically, it measures by what percent the quantity supplied will increase following a 1% change. the larger this percent change in quantity supplied, the more responsive sellers are to price changes
to measure this, observe how the quantity supplied responds to a price change
specifically, you can measure this as the percent change in quantity supplied to the percent change in price as you move along your supply curve

is a positive number
question
flexibility
answer
price elasticity of supply is all about
reflects the ? of firms to increase of decrease the quantity supplied. it is larger:
1) for firms that store inventories
2) when inputs are easily available
3) for firms with extra capacity
4) when firms can easily enter and exit the market
5) when there's more time to adjust
1 of 15
question
price elasticity of demand
answer
measure how responsive buyers are to price changes
specifically, it measure by what percent the quantity demanded will change in response to a 1% price change
the responsiveness is measured by the ratio of the percent change in price as you move along the demand curve

= percent change in quantity demanded / percent change in price

use absolute value to focus on the magnitude (because we are comparing percent change)
question
elastic
answer
when the absolute value of the percent change in quantity is larger than the absolute value of the percent change in price, which means that the absolute value of the price elasticity is greater than 1

when demand is ?, price increases also lead to large changes in the quantity demanded

the ? demand curve is relatively flat
question
inelastic
answer
when the absolute value of the percent change in quantity in smaller than absolute value of the percent change in price, which means that the absolute value of the price elasticity is less than 1

when quantity is unresponsive, demand is ?

the ? demand curve is relatively steep
question
unit elastic
answer
when the absolute value of the price elasticity of demand is exactly equal to 1 it is neither elastic nor elastic
question
perfectly elastic
answer
when any change in price leads to an infinitely large change in quantity
horizontal demand curve
question
perfectly inelastic
answer
when quantity does not respond at all to a price change
vertical demand curve
question
price elasticity demand reflects the availability of substitutes
answer
elasticity is all about substitutability. price elasticity demand is larger when:
1) when there are more competing products
2) for specific brands rather than broad categories
3) for things that aren't necessities
4) when consumers search more
5) when there's more time to adjust
question
total revenue
answer
the total amount you receive from buyers, which equals price times quantity
question
less total revenue
answer
higher prices lead to ? if demand is elastic
question
more total revenue
answer
higher prices lead to ? if demand is inelastic
question
raise your prices
answer
if demand for your product is currently inelastic, you should
question
cross price elasticity of demand
answer
measures how responsive the quantity demanded of one good is to price changes of another
specifically, it measures the percent change in the quantity demanded following a 1% change in the price of another good
we measure this as the ratio of the percent change in quantity demanded to the percent change in the price of another good

it is positive for substitutes and negative for complements
it is near zero for independent goods
question
income elasticity of demand
answer
measures how responsive your demand for a good is to changes in your income
specifically, it measures by what percent the quantity demanded will change following a 1% change in income
we measure this as the ratio of the percent change in quantity demanded to the percent change in income

is positive for normal goods and negative for inferior goods
question
price elasticity of supply
answer
measures how responsive sellers are to price changes
specifically, it measures by what percent the quantity supplied will increase following a 1% change. the larger this percent change in quantity supplied, the more responsive sellers are to price changes
to measure this, observe how the quantity supplied responds to a price change
specifically, you can measure this as the percent change in quantity supplied to the percent change in price as you move along your supply curve

is a positive number
question
flexibility
answer
price elasticity of supply is all about
reflects the ? of firms to increase of decrease the quantity supplied. it is larger:
1) for firms that store inventories
2) when inputs are easily available
3) for firms with extra capacity
4) when firms can easily enter and exit the market
5) when there's more time to adjust
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