Principles of Microeconomics Chapter 5 Elasticity & Its Application

Necessities

________ have small income elasticities (ex.

Inelastic

________: increase in price leads to an increase in total revenue (fall in Q is proportionately smaller than rise in P) and the opposite is true when it is elastic.

Elasticity

What is not the same in both directions (ex? Answer with a single words or term.

Complements

________: CP elasticity of demand is-) (and move in opposite direction5- 2 The Elasticity of Supply.

UNIT ELASTIC

________ (PE= 1): total revenue remains constant when price changes.

Vertical line

________: perfectly inelastic; horizontal line: perfectly elastic.

Availability of close substitutes

________: more close substitutes means more elastic because consumers can switch goods easily.

Normal goods

________: (+) income elasticities; inferior goods:-) (income elasticities.

Total revenue

________= P* Q (price* quantity sold)

Flatter supply curve

________ means it is more elastic.

Elasticity of supply

What is NOT constant in some markets? Answer with a single words or term.

Vertical curve

________= perfectly inelastic; horizontal curve= perfectly elastic.

Price elasticity of supply

________= % change in quantity supplied divided by the % change in price.

Price elasticity of demand

________ using the midpoint method= (Q2- Q1)/ [(Q2+Q1)/2]/ (P2- P1)/ [(P2+P1)/2]

Income elasticity of demand

________: measures how the quantity demanded changes as consumer income changes.

Definition of the market

________: narrowly defined markets are more elastic (such as the ice cream market), whereas broadly defined markets are more inelastic (such as the food market)

Elastic demand

________ means that quantity demanded responds substantially, whereas inelastic demand means that quantity demanded responded slightly.

Drug interdiction intervention →

________ raises costs for selling drugs (supply curve shifts left) → decreases drug use BUT since drugs are inelastic, increase in price raises total revenue (aka drug users pay more) → because of higher price, drug- related crime increases.

Price elasticity of supply

________: measures how much the quantity supplied responds to changes in price.

Elasticity of supply

________ is high for low levels of QS because there is idle equipment, so increase in price make it profitable for firms.

Price elasticity of demand

________= % change in quantity demanded divided by the % change in price.

Price elasticity of demand

________: measures how much the quantity demanded responds to a change in price.