eco test 2 study guide

# eco test 2 study guide - Chap 6 Price elasticity of demand...

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Chap 6 Price elasticity of demand – how responsive a demand curve is to a change in price o Price Elasticity = (% change in quantity) / (% change in price) NOTE: price elasticity is not the same as the slope of the demand curve If the change in quantity is greater than the change in price, it is to say that demand is elastic o When ever the absolute value of elasticity is greater than one, demand is elastic o On another note, when the change in quantity is less than the change in price, demand is said to be inelastic Absolute value will be less than one o When the change in quantity is equal to the change in price, demand is said to be unit-elastic o The steeper the demand curve, the less elastic demand is Perfectly elastic – horizontal line, slope = 0 Perfectly inelastic – vertical line, slope is undefined In determining price elasticity, there are 5 factors o Availability of close substitutes More substitutes available means more elastic demand o Passage of time The more time that passes, the more elastic demand is o Necessities vs. luxuries Demand curves for luxuries are more elastic than those of necessities o Definition of the market The more narrowly defined market has more elastic demand o Share of the good in a consumer’s budget The more a good has a share in a consumer’s budget, the more elastic demand is o When demand is inelastic, revenue and price move together Increase in price = increase in revenue o When demand is elastic, revenue and price move inversely Decrease in price = increase in revenue Cross-price elasticity of demand – measures the effect on quantity demanded of one good due to a change in price of another good o C.P.E. = (% change in quantity for good 1)/(% change in price for good 2) o Cross-price elasticity tells us some things about goods too, if CPE is: Positive , then products are substitutes

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Negative , then products are complements Zero , then the products are unrelated Income elasticity – measures how responsive demand is to a change in income o I.E. = (% change in quantity) / (% change in income) o Like CPE, income elasticity can also tell us about goods, if IE is: Positive and <1 , good is normal and a necessity Positive and >1 , good is normal and a luxury Negative , good is inferior Price elasticity of supply is calculated the same way as demand, the difference is the percentage change in quantity supplied instead of demanded Chap 8 In the past 50 years, international trade has grown dude to falling costs in communication, travel, and shipping, along with changes in government policies regarding tariffs on imports International trade is driven by comparative advantage o If one country can produce something at a lower opportunity cost than another country, then it should specialize in production of that good and then trade with a country that is specializing in another good
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## This note was uploaded on 04/13/2008 for the course ECO 001 taught by Professor Gunter during the Spring '06 term at Lehigh University .

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eco test 2 study guide - Chap 6 Price elasticity of demand...

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