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straightupdeme
on FreezingBlue Flashcards.
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The most important determinant of demand elasticity is...
the number and closeness of substitutes.
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If expenditures on a good constitute a fairly large proportion of a consumer's budget, then...
a price change will have a large effect on the consumer's real income
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Income elasticity of demand
the percentage change in quantity demanded divided by the percentage change in income
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Inferior goods
Demand for good falls as income increases and they have a negative income elasticity of demand.
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Normal goods
Goods with a positive income elasticity of demand, which means that demand for such goods increases as income increase
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Cross-price elasticity of demand
measures the percentage change in quantity demanded of one good divided by the percentage change in price of another good
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Price elasticity of demand is defined as
the percentage change in quantity demanded divided by the percentage change in price.
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If demand is price elastic, then
total revenue will increase if the price falls.
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If demand is price elastic and price decreases, then
the extra revenues from the extra units sold exceed the loss in revenues from the lower price.
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If a demand curve has an elasticity of demand of 1.0 everywhere, then a 40-percent change in price will
not cause a change in total revenue.
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Price elasticity of demand is greater
the greater the availability of close substitutes.
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When expenditures on a certain good make up a large proportion of your budget,
demand is price elastic because an increase in price has a large effect on your ability to buy the good.
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The greatest response to a price increase for a good is likely to be
after a year.
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Price elasticity of demand increases over time because
the ability to substitute away from higher-priced goods increases over time.
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Salt has a low elasticity of demand because
it has few close substitutes and it is a small fraction of a consumer's budget.
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As time increases
both demand and supply become more elastic.
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Suppose the government raises the tax on a gallon of gasoline by 20 percent. Then we would expect
tax revenues to rise sharply almost immediately, but to decline from the new levels after a few years.
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A firm's revenues are the largest possible when it operates on
the point on its demand curve where the elasticity of demand equals 1.0.
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A unit-elastic supply curve is
a straight line through the origin.
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Suppose demand increases with rising income, but by a smaller percentage than the increase in income. In this case,
the income elasticity of demand is between zero and 1.0.
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If the income elasticity of demand is very high, we expect the price elasticity of demand to be
elastic
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The cross-price elasticity of demand indicates
whether two goods are substitutes or complements
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A product has a large negative cross-price elasticity with several other products. We would expect the product's price elasticity of demand to be
elastic.
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Governments tend to tax goods with
inelastic demands because they want tax revenues to be large
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