Term
| How an INCREASE IN DEMAND Affects the Equilibrium |
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Definition
Hot weather increases:
[image] |
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Term
| How a DECREASE IN DEMAND Affects the Equilibrium |
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Definition
Earthquake reduces demand on ice cream
[image] |
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Term
| What does 'Ambiguous' mean? |
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Definition
| Equilibrium could go up or down if both the Supply and Demand curve shift |
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Term
| What does the change in an ambiguous change depend on? |
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Definition
| Depends on the RELEVANT SIZE of the shift, so will not know until you know the size of the shift of both curves. |
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Term
| when can an Ambiguous shift occur? |
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Definition
| When both the Supply and Demand curves shift |
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Term
| Reasons why curves may shift - BUYER'S SIDE |
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Definition
- Tastes
- Income
- Price of other goods
- Number of buyers |
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Term
| Reasons why curves may shift - SELLER'S SIDE |
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Definition
- Price of inputs
- Environment
- Number of suppliers
- Technology |
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Term
| Reasons why curves may shift - GOVERNMENT INTERFERENCE |
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Definition
- Tax on goods
- Price floor
- Price ceiling |
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Term
| What does ELASTICITY mean? |
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Definition
| The measure of the sensitivity or responsiveness (extreme sensitivity or not?) |
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Term
| What does PRICE OF DEMAND (PED) mean? |
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Definition
| Measures how sensitive quantity is to the price |
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Term
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Definition
| PED = (Price 1/ Quantity 1) x (1/Slope) |
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Term
| PED note on negative sign... |
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Definition
The larger the elasticity number, the more sensitive it is IGNORING THE SIGN (focus on the ABSOLUTE VALUE)
E.G. PED=-2 compared to PED=-4, - 4 is more elastic |
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Term
| Elasticity of the demand curve at Midpoint example |
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Definition
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Term
| Elasticity of the demand curve at Midpoint characteristics |
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Definition
- The price elasticity of demand at MIDPOINT of demand curve is ALWAYS 1.
- Midpoint is when total revenue is MAXIMISED |
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Term
| Elasticity of demand curve point A - Low Demand and high price example |
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Definition
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Term
| Elasticity of the demand curve when PED is GREATER than 1? |
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Definition
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Term
| Elasticity of demand curve point B - High Demand and Low price example |
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Definition
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Term
| Elasticity of the demand curve when PED is LOWER than 1? |
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Definition
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Term
| Why is elasticity not the same as slope? |
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Definition
Elasticity changes over the linear demand curve.
Above 1 is elastic
Midpoint (max revenue) = 1
Below 1 is inelastic |
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Term
What is this graph called, and what does it indicate?
[image] |
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Definition
ELASTIC
=> Perfect competition
- Value for horizontal is infinite
- If you raise the price by one cent, quantity is so sensitive you will make no sales |
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Term
What is this graph called, and what does it indicate?
[image] |
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Definition
INELASTIC
=> Perfectly inelastic/vertical
- Value here for PED=0, can charge any price you want and quantity will not falter |
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Term
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Definition
| Is the amount paid by buyers and received by sellers of a good |
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Term
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Definition
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Term
| When is total revenue is at total maximum |
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Definition
When PED=1
Very hard to find that point in real life |
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Term
| With an inelastic Demand Curve (PED<1), what happens when price increases? |
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Definition
| Leads to a decrease in quantity that is proportionately smaller, so total revenue will INCREASE. |
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Term
| With an inelastic Demand Curve (PED<1), what happens when price decreases? |
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Definition
| Leads to an increase in quantity that is proportionally smaller, thus total revenue DECREASES. |
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Term
| With an elastic Demand Curve (PED>1), what happens when price increases? |
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Definition
| Leads to a decrease in quantity demanded that is proportionally larger, so total revenue DECREASES. |
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Term
| With an elastic Demand Curve (PED>1), what happens when price decreases? |
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Definition
| Leads to a decrease in quantity demanded that is proportionally larger, so total revenue INCREASES. |
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Term
| Why will the value of elasticity always be negative when wither price or quantity changes? |
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Definition
Because if price increases, quantity will decrease (negative)
and if quantity increases, this indicates price decreased (negative). Therefore on of the two will awakes be a negative value input into the PED = P/Q x 1/slope equation. |
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Term
| Does it matter if the elasticity is negative? |
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Definition
No because we always take the ABSOLUTE value, which means that in most cases what we care about is the magnitude of that number and ignore the negative sign.
e.g. a 10% increase (decrease) in price will lead to a 20% decrease (increase) in quantity demanded. |
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Term
| What is Cross Elasticity of Demand? |
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Definition
| The responsiveness of quantity demanded to a given change in the price of another good. |
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Term
| What does Cross Elasticity of Demand depend on? |
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Definition
| On whether the good is a complement or a substitute. |
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Term
| Cross Elasticity Substitute tea example |
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Definition
Price of Tea INCREASES
Quantity of tea demanded DECREASES
Quantiy of coffee demanded INCREASES |
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Term
| Will the Cross Elasticity of Substitutes be negative or positive and why? |
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Definition
POSITIVE
Because if price of tea increases, demand of coffee increases = +,+ = positive
Price of tea decreases, demand of coffee decreases = -,- = positive |
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Term
| Will the Cross Elasticity of Complements be negative or positive and why? |
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Definition
NEGATIVE
If price of coffee increases, demand of coffee creamers goes down = +,- = negative
If price of coffee decreases, demand of coffee creamers increases = -,+ = negative |
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Term
| Ranges of Elasticity - Perfectly Elastic (Horizontal Line) [image] |
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Definition
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Term
Ranges of Elasticity - Relatively Elastic
[image] |
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Definition
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Term
Ranges of Elasticity - Unit Elastic
[image] |
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Definition
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Term
Ranges of Elasticity - Relatively Inelastic
[image] |
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Definition
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Term
Ranges of Elasticity - Perfectly Inelastic
[image] |
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Definition
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Term
| What does an Inelastic mean? |
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Definition
| insensitive to changes in price or income. |
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Term
| What does an elastic mean? |
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Definition
| sensitive to changes in price or income. |
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