Micro Chap 4

The flashcards below were created by user bwood190 on FreezingBlue Flashcards.

1. Price Elasticity of Demand
units free measure of the responsiveness of the qty demanded of a good to a change in its price when all other influences remain the same
2. FORMULA
• (Change in qty / average qty)/(change in price / average price)
• Units free measure
3. Perfectly Inelastic Demand
• if qty remains constant when a change in price occurs
• Ed = 0
• eg. insulin
4. Unit Elastic Demand
E= 1
5. Inelastic Demand
• E= b/w 0 and 1
• eg. food
6. Perfectly Elastic Demand
Huge qty demand change to small price change
7. Elastic Demand
Ed = >1
8. Linear Demand Curve
• shows elasticity
• ed changes depending on where you are on graph
• midpoint should be 1
9. Total Revenue
• price of good * qty sold
• changes w/ changes in price
10. Elastic (rev.)
• 1% price cut = increase qty sold >1%
• total rev increases
11. Inelastic (rev)
• 1% price cut = increase qty sold <1%
• total rev down
12. Unit Elastic (rev)
• 1% price cut = increase qty sold by 1%
• no change in rev
13. Total Revenue Test
• method of estimating price elasticity of demand by observing change in revenue when all other influences remain the same
• Price cut increases total revenue, demand is elastic
• Price cut decreases total revenue, demand is inelastic
• Price cut doesn't change total rev, demand is unit elastic
• Elastic - price cut 1%, increase qty purchased by >1%
• Inelastic - price cut 1%, increase qty purchased by <1%
• Unit Elastic - price cut 1%, increase qty purchased by 1%
15. Factors that Influence
• elasticity of demand depends on 3 factors
• closeness of substitute
• proportion of income spend on good
• time elapsed since price changed
16. Closeness of Substitute
• closer substitutes, more elastic demand
• necessity - poor substitutes or crucial for well being. Food is generally inelastic
• Luxuries - many substitutes, elastic demand
17. Income Spent on Good
• more spend, more elastic demand for it
• eg gum vs house price. Don't notice change in price of gum
18. Time elapsed since Price Change
• more time, more elastic demand
• or longer it can be stored w/o losing value
• <time <responsive
19. Cross Elasticity of Demand
• measure demand and change in price of a substitute or compliment
• substitutes - positive. goes in same direction. price of burger up, price of pizza up
• compliments - negative. opposite directions. price of sugar up, price of tea down
20. Income Elasticity of Demand
• demand for good and change in income, other things remaining the same
• >1 - normal good, elastic income. % spent on good up as income increases
• 0<1 - normal good, inelastic income. % spent on good down as income increases
• negative - inferior good.% spent down as income increases
21. Elasticity of Supply
• qty supplied to a change in selling price
• Elastic = >1
• Inelastic = 0<1
• Unit elastic = 1
• Perfectly inelastic = 0
 Author: bwood190 ID: 260151 Card Set: Micro Chap 4 Updated: 2014-02-06 05:57:27 Tags: Microeconomics Chap Folders: Description: Micro ch. 4 Show Answers: