Chapter 6: Elasticity, Consumer Surplus, and Producer Surplus

Price elasticity of demand

Responsiveness of consumers to a price change

Slope

________ can not be used to judge elasticity.

Midpoint formula

Averages the 2 prices and the 2 quantities as reference points for computing percentages

Elastic

Specific percent change in price results in a larger percent change in quantity demanded; elasticity of demand greater than 1

Inelastic

Specific percent change in price results in a smaller percent change in quantity demanded; elasticity of demand less than 1

Unit elasticity

Percent change in price is equal to resulting percent change in quantity demanded; elasticity of demand equals 1

Perfectly inelastic

Price-elasticity coefficient equals 0; no response to change in price

Perfectly elastic

A small price reduction causes buyers to increase purchases from 0 to all they can obtain; price-elasticity coefficient equals infinity

Total revenue

Total amount seller receives from sale of a product in a particular time period; price * quantity sold

Total-revenue test

Test to infer whether demand is elastic or inelastic

Price elasticity of supply

How easily/quickly producers can shift resources b/w alternative uses

Market period

Period that occurs when the time immediately after a change in market price is too short for producers to respond with a change in quantity supplied

Short run

Period of time too short to change plant capacity but long enough to use the fixed-sized plant more or less intensively

Long run

Period of time that is long enough for firms to adjust plant sizes + for firms to enter or leave the industry

Cross elasticity of demand

How sensitive consumer purchases of one product are to a change in the price of another product

Income elasticity of demand

Degree to which consumers respond to a change in their incomes by buying more or less of a particular good

Consumer surplus

Benefit surplus received by consumers in a market

Producer surplus

Benefit surplus received by producers in a market

Efficiency losses

Reductions of combined consumer + producer surplus

Deadweight loss

Efficiency loss to society