*Recently Updated* - Economics Chapter 5

elasticity

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

price elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in its price, calculated as the percentage change in quantity demanded divided by the percentage change in price

total revenue

the amount paid by buyers and received by sellers of a good, calculated as the price of the good times the quantity sold

sensitivity

when price changes for a good, quantity demanded is highly affected

insensitivity

when price changes for a good, quantity demanded is affected very little or not at all

factors to determine consumer sensitivity/insensitivity

consumers are more sensitive to price change when products have many substitutes

consumers tend to be more sensitive to price change for goods and services that take large portion of budget

the more time consumers have to adjust to price change, the more sensitive they will be

elastic vs. inelastic

elastic = more sensitive

inelastic = insensitive

true or false: narrowly defined markets tend to have more elastic demand than broadly defined ones

true

ex: food, a broad category, has a fairly inelastic demand because there are no good substitutes for food

ex: ice cream, a narrow category, has. amore elastic demand because it is easy to substitute other desserts for ice cream

how do economists compute the price elasticity of demand?

percentage change in the quantity demanded divided by the percentage change in price

when the quantity moves proportionately more than the price, the elasticity is greater than one, and demand is said to be...

elastic

when the quantity moves proportionately less than the price, the elasticity is less than one, and demand is said to be...

inelastic

when the percentage change in quantity equals the percentage change in price, the elasticity is exactly 1, and demand is said to have...

unit elasticity

when demand is inelastic, the price and total revenue...

move in the same direction

ex: when price increases, total revenue increases as well

when demand is elastic, the price and total revenue

move in opposite directions

ex: when price increases, total revenue decreases

if demand is unit elastic, the price and total revenue

remain constant when the price changes