# 4 – Elasticity

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cross elasticity of demand
the responsiveness of the demand for a good to a change in the price of a substitute or complement, other things remaining the same; calculated as the percentage change in the quantity demanded divided by the percentage change in the price of the substitute or complement
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elastic demand
demand with a price elasticity greater than 1; other things remaining the same, the percentage change in the quantity demanded exceeds the percentage change in price
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elasticity of supply
the responsiveness of the quantity supplied of a good to a change in its price, other things remaining the same
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income elasticity of demand
the responsiveness of the demand for a good to a change in income, other things remaining the same; calculated as the percentage change in the quantity demanded divided by the percentage change in income
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inelastic demand
a demand with a price elasticity between 0 and 1; the percentage change in the quantity demanded is less than the percentage change in price
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perfectly elastic demand
demand with an infinite price elasticity; the quantity demanded changes by an infinitely large percentage in response to a tiny price change
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perfectly inelastic demand
demand with a price elasticity of 0; the quantity demanded remains constant when the price changes
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price elasticity of demand
the units-free measure of the responsiveness of the quantity demanded of a good to a change in its price, when all other influences on buyers' plans remain the same
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total revenue
the value of a firm's sales; calculated as the price of the good multiplied by the quantity sold
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total revenue test
a method of estimating the price elasticity of demand by observing the change in total revenue that results from a change in the price, when all other influences on the quantity sold remain the same
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unit elastic demand
demand with a price elasticity of 1; the percentage change in the quantity demanded equals the percentage change in price
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True/false: the price elasticity of demand is the same as the slope of the demand curve.
false: the slope of the demand curve equals the change in y over the change in x whereas the price elasticity of demand equals (the change in Q divided by the average Q) divided by (the change in P divided by the average P).
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True/false: the price elasticity of demand ranges from 0 to infinity.
true: the smallest value for the price elasticity of demand, 0, means demand is perfectly inelastic; the largest, infinity, means perfectly elastic demand.
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True/false: the more demanders respond to a price change, the larger the price elasticity of demand.
true: the stronger the response to a price change, the larger is the elasticity.
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True/false: Exxon brand gasoline is likely to have an elastic demand.
true: other brands of gasoline, such as Shell or BP, are close substitutes for Exxon, so the demand for Exxon gasoline is likely to be elastic.
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True/false: people spend more on rent than on soap, so the price elasticity of demand for housing is likely to be larger than the price elasticity of demand for soap.
true: generally, the larger the total budget share spent on a good, the larger is the price elasticity of demand.
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True/false: the price elasticity of demand for food is largest in poor nations.
true: the price elasticity of demand for food in poor nations is larger than that in rich nations because in poor nations, food takes a larger portion of consumer's incomes.
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True/false: as time passes after a price change, the price elasticity of demand becomes smaller.
false: as more time passes, more changes in demand can occur, so demand becomes more elastic.
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True/false: moving along a linear demand curve to lower prices and increased quantities, the price elasticity of demand does not change.
false: moving downward along a linear demand curve, the price elasticity of demand falls.
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True/false: your local Domino's Pizza outlet estimates that the price elasticity of demand for its pizza is 4.00, so if it raises the price it charges for its pizza, its total revenue will increase.
false: the demand for Domino's Pizza is elastic; raising the price decreases the quantity by so much that total revenue declines.
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True/false: a good has an elastic demand if its income elasticity of demand exceeds 1.0.
false: to be elastic, the price elasticity of demand must exceed 1.0.
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True/false: an inferior good has an income elasticity that is negative; a normal good has an income elasticity that is positive.
true: an increase in income decreases the demand for inferior goods and increases it for normal goods.
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True/false: the cross elasticity of demand between hot dogs and hot dog buns is negative.