Chapter 5 example #48045

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a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants

a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price -Demand for a good is said to be elastic if the quantity demanded responds substantially to changes in the price. -Demand is said to be inelastic if the quantity demanded responds only slightly to changes in the price.

-Demand for a good is said to be elastic if the quantity demanded responds substantially to changes in the price. -Demand is said to be inelastic if the quantity demanded responds only slightly to changes in the price.

-how willing consumers are to buy less of the good as its price rises. -Because a demand curve reflects the many economic, social, and psychological forces that shape consumer preferences, there is no simple, universal rule for what determines a demand curve's elasticity. -Based on experience, however, we can state some rules of thumb about what influences the price elasticity of demand.

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-Narrowly defined markets tend to have more elastic demand than broadly defined markets because it is easier to find close substitutes for narrowly defined goods. -For example, food, a broad category, has a fairly inelastic demand because there are no good substitutes for food. Ice cream, a narrow category, has a more elastic demand because it is easy to substitute other desserts for ice cream. Vanilla ice cream, an even narrower category, has a very elastic demand because other flavors of ice cream are almost perfect substitutes for vanilla.

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Price elasticity of demand = (percentage of quantity)/ percentage change in price

true -For this reason, price elasticities of demand are sometimes reported as negative numbers.

A greater responsiveness of quantity demanded to changes in price

computes a percentage change by dividing the change by the midpoint (or average) of the initial and final levels. -Because it gives the same answer regardless of the direction of change, it is often used when calculating the price elasticity of demand between two points.

Demand is considered elastic when the elasticity is greater than one, which means the quantity moves proportionately more than the price.

Demand is considered inelastic when the elasticity is less than one, which means the quantity moves proportionately less than the price.

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-Because the price elasticity of demand measures how much quantity demanded responds to changes in the price, it is closely related to the slope of the demand curve. The following rule of thumb is a useful guide: -The flatter the demand curve passing through a given point, the greater the price elasticity of demand. -The steeper the demand curve passing through a given point, the smaller the price elasticity of demand.

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the amount a firm receives for the sale of its output total revenue is , the price of the good times the quantity of the good sold.

-The answer depends on the price elasticity of demand. If demand is inelastic, as in panel (a) of Figure 3, then an increase in the price causes an increase in total revenue -We obtain the opposite result if demand is elastic: An increase in the price causes a decrease in total revenue.

This is true because the slope is the ratio of changes in the two variables, whereas the elasticity is the ratio of percentage changes in the two variables.

a measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income -Income elasticity of demand= (percentage change in quantity demanded)/ percentage change in income -most goods are normal goods: Higher income raises the quantity demanded. Because quantity demanded and income move in the same direction, normal goods have positive income elasticities. A few goods, such as bus rides, are inferior goods: Higher income lowers the quantity demanded. Because quantity demanded and income move in opposite directions, inferior goods have negative income elasticities. -Necessities such as food tend to have small income elasticities because consumers choose to buy some of these goods even when their incomes are low -luxuries such as jewelry and recreational goods tend to have large income elasticities because consumers feel that they can do without these goods altogether if their incomes are too low.

As a family's income rises, the percent of its income spent on food declines, indicating an income elasticity less than one.

a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in price of the second good -Cross price elasticity of demand = (percentage change in quantity demanded of good one)/ percentage change in the price of good two -Whether the cross-price elasticity is positive or negative depends on whether the two goods are substitutes or complements. ----substitutes are goods that are typically used in place of one another, such as hamburgers and hot dogs. An increase in hot dog prices induces people to grill more hamburgers instead. Because the price of hot dogs and the quantity of hamburgers demanded move in the same direction, the cross-price elasticity is positive. Conversely, complements are goods that are typically used together, such as computers and software. In this case, the cross-price elasticity is negative, indicating that an increase in the price of computers reduces the quantity of software demanded.

goods that are typically used in place of one another, such as hamburgers and hot dogs. -An increase in hot dog prices induces people to grill more hamburgers instead. Because the price of hot dogs and the quantity of hamburgers demanded move in the same direction, the cross-price elasticity is positive. -Conversely, complements are goods that are typically used together, such as computers and software. In this case, the cross-price elasticity is negative, indicating that an increase in the price of comp

a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price -Supply of a good is said to be elastic if the quantity supplied responds substantially to changes in the price. -Supply is said to be inelastic if the quantity supplied responds only slightly to changes in the price. -Price elasticity of supply= (percentage change in quantity supplied)/(percentage change in price)

The price elasticity of supply depends on the flexibility of sellers to change the amount of the good they produce.

-the time period being considered. -Supply is usually more elastic in the long run than in the short run. -Over short periods of time, firms cannot easily change the size of their factories to make more or less of a good. -------thus, in the short run, the quantity supplied is not very responsive to changes in the price. -Over longer periods of time, firms can build new factories or close old ones. In addition, new firms can enter a market, and old firms can exit. -------Thus, in the long run, the quantity supplied can respond substantially to price changes.

Supply curve is vertical

Horizontal supply curve

-For low levels of quantity supplied, the elasticity of supply is high, indicating that firms respond substantially to changes in the price. In this region of the supply curve, firms have additional capacity for production, such as plants and equipment that are idle for all or part of the day. -Small increases in price make it profitable for firms to begin using this idle capacity. -As the quantity supplied rises, firms begin to reach capacity. Once capacity is fully used, further increases in production require the construction of new plants. -To induce firms to incur this extra expense, the price must rise substantially, so supply becomes less elastic.