# Microeconomics Chapter 5

 What is price elasticity of demand •The responsiveness, or sensitivity, to a change in price What is the definition of price elasticity of demand? •The ratio of the percentage change in the quantity demanded of a product to a percentage change in its price What is the equation of Price elasticity Ed=  % D in Q demanded / % D in price Price elasticity equals the...what? Change in quantity demanded sum of quantities/2 divided by D Change in price sum of prices/2 What is the midpoint formula: Q2-Q1/ Q1+Q2 /// P2-P1/ P1+P2 If we do not have percentages we can use what? Midpoint formula What is elastic demand? a condition in which % of change in quantity demand is greater than % change in price What is total revenue? # total of dollars a firm earns from a sale of a good or service, = to its price x by deamnded quantity What happens to total revenue as price increases? decrease what happens to total revenue as price decreases? increases What is inelastic demand? •The percentage change in the quantity demanded is less than the percentage change in price what happens to total revenue during inelastic demand as price increases? increases what happens to total revenue during inelastic demand when price decreases decrease What is a unitary elastic demand curve? •The percentage change in the quantity demanded is equal to the percentage change in price is there a change in total revenue as price decrease or increases during unitary elastic demand? there is no change What is a perfectly elasticdemand curve? •An extreme condition in which a small percentage change in price brings about an infinite percentage change in the quantity demanded In perfectly elastic demand a price change causes what ? infinite change in quantity demand What is a perfectly inelasticdemand curve? •Another extreme  condition in which the quantity demanded does not change as the price changes. In perfectly inelastic demand price change does what zero change in quantity demanded If a college raises tuition, what happensto total revenue If demand is elastic - total revenue decreases           If demand is inelastic - total revenue increases                                If demand is unitary elastic – total revenue is constant If price increases and the revenue gained is less  than the revenue lost, the demand curve is price elastic > 1 If total revenue does not change when price increases, the demand curve is unitary elastic =1 If price increases and the revenue gained is greater than the revenue lost, the demand curve is price inelastic < 1 Does price elasticity of demandvary along a demand curve? •Yes. The price elasticity of demand coefficient of demand applies only to a specific range of prices along the demand curve. What factors influence demand elasticity? •Availability of substitutes•Share of budget on the product•Adjustment to a price change over time What do substitutes have to dowith a price change? •The more substitutes a product has, the more sensitive consumers are to a price change, and the more elastic the demand curve What conclusion can we makeconcerning substitutes? •The price elasticity of demand is directly related to the availability of good substitutes for a product What does the share of one’sbudget have to do with a price change? •The larger the purchase is to one’s budget, the more sensitive consumers are to a price change, and the more elastic the demand curve What does time have to do withsensitivity? •The longer consumers have to adjust, the more sensitive they are to a price change, and the more elastic the demand curve What are other elasticitymeasures? •Income elasticity of demand•Cross-elasticity of demand What is income elasticity ofdemand? •The ratio of the percentage change in the quantity demanded of a good to a given percentage change in income Income Elasticity of Demand formula?? % change in Q demanded / % change in income What is cross-elasticity ofdemand? •The ratio of the percentage change in quantity demanded of a good to a given percentage change in price of another good Cross-elasticity of Demand formula? % of change in Q demanded of good A/ % change in price of good B Price Elasticity of Supply % in change Q supplied / % change in price Who pays the tax levied onsellers of goods such as gasoline, cigarettes, and alcoholic beverages? •It all depends; the corporation pays all, some, or very little of the tax What decides who pays what partof the tax increase? •The more elastic the demand, the more the corporation pays; the less elastic the demand, the more the consumer pays A perfectly elastic demand curve has an elasticity coefficient? Infinity A elastic demand curve has an elasticity coefficient? greater than 1 A inelastic demand curve has an elasticity coefficient? less than 1 A unitary elastic demand curve has an elasticity coefficient? =1 A perfectly inelastic demand curve has an elasticity coefficient? = 0 if promoters raise their prices from \$10 to \$40 per ticket, then their total revenue will increases The longer the time period under study, the more elastic is the price elasticity of demand The cross elasticity of demand for substitute products must: be greater than zer0 If the demand curve is unit elastic, this implies that: the percentage change in the quantity demanded = the percentage change in product price suppose promoters charge a price of \$30 per ticket. How much total revenue will their sales generate 10 tickets 300,000 If a good has a price elasticity of demand coefficient less than one, then: inelastic demand As the economy recovers from a recession, we should expect that demand for: inferior goods will rise and demand for non-inferior goods will fall Governments can use price elasticity of demand to estimate how changes in excise tax rates will affect: tax revenues if the area OABC equals the area ODEF, the demand curve is unitary elastic The number of CDs purchased increased by 50 percent when consumer income increased by 10 percent. Assuming other factors are held constant, CDs would be classified as: normal good The price elasticity of demand measures consumer responsiveness to a price change. true To determine whether two goods are substitutes or complements, an economist would estimate the: cross-elasticity of demand The demand for a product is likely to be more elastic: when more good substitutes for the product are available. It is Valentine's Day and Jason is desperately looking all over town for a dozen roses to give to Judy. Most likely, Jason's price elasticity of demand is: less than 1 The Smith family buys much more macaroni when someone in the family is laid off. This means that the Smiths' ____ is negative. income elasticity for macaroni If the demand curve for a good is elastic, consumers will spend more on that good when its price increases. false Consider the market for bicycles. If a dealer cuts prices by 10 percent and sells 20 percent more bikes, then demand for bicycles is: elastic and TR will decrease Suppose the president of a textbook publisher argues that a 10 percent increase in the price of textbooks will raise total revenue for the publisher. It can be concluded that the company president thinks that demand for textbooks is: inelastic Authorelizabethsanchez_1025 ID237078 Card SetMicroeconomics Chapter 5 Descriptioneconomics Updated2013-10-04T02:31:46Z Show Answers