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midterm 2 ch6 sg

# midterm 2 ch6 sg - Microeconomics Midterm 2 Study...

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Unformatted text preview: Microeconomics Midterm 2 Study Guide (Chapter 6) Extensions of Demand and Supply Analysis: Demand Price elasticity of Demand: The responsiveness of consumers to a price change is measured by a products price elasticity of demand. Formula (Midpoint): Ed = Change in Quantity Change in Price Sum of Quantities/2 Sum of Prices/2 Elastic Demand: The resulting % change in qty demanded is greater than the % change in price Ed > 1 Inelastic Demand: The resulting % change in qty demanded is less than the % change in price Ed < 1 Unit Elasticity: % change in quantity demanded or supplied is equal to the % change in price Ed = 1 Perfect Inelasticity: Product or resource demand in which price can be of any amount at a particular quantity of the product or resource demanded. Price change results in no change whatsoever. Graph is vertical line. Ed = 0 Perfectly Elastic: Product or resource demand in which quantity demanded can be of any amount at a particular product price. Graph is horizontal line. Ed = Total Revenue Test: tells whether demand is elastic or inelastic. TR = P X Q where P is price and Q is quantity demanded and sold. 1) If TR changes in opposite direction from price, demand is elastic. 2) If TR changes in the same direction as price, demand is inelastic. 3) If TR does not change when price changes, demand is unit elastic Elastic Demand: when demand is elastic... A increase in price will decrease TR A decrease in price will increase TR Inelastic Demand: when demand is inelastic... A increase in price will increase TR A decrease in price will decrease TR Determinants of Price Elasticity of Demand: 1) Substitutability larger # of subs, the greater the price elasticity of demand 2) Proportion of Income the higher the price of a good relative to consumer's incomes the greater the elasticity 3) Luxuries versus Necessities the more a good is seen as a "Luxury" the more price elasticity of demand it has. Supply Price Elasticity of Supply: The responsiveness of suppliers to a price change is measured by price elasticity of supply. Formula: Es = % change in quantity supplied of Product X % change in price of product X 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 The Short Run: a period too short to change plant capacity but long enough to use fixed plant more or less intensively. Vs. The Long Run: a period long enough for firms to adjust their plant sizes and for new firms to enter the industry. Cross Elasticity and Income Elasticity of Demand Cross Elasticity of Demand: measures how sensitive consumer purchases of one product are to a change in the price of some other product. Formula: Exy = % change in quantity demanded of Product X % change in price of Product Y 1) Substitute Goods: Exy = positive 2) Complementary Goods: Exy = negative 3) Unrelated Goods: Exy = 0 or near zero Income Elasticity of Demand: measures the degree to which consumers respond to a change in their incomes by buying more or less of a particular good. Formula: Ei = % change in quantity demanded % change in income 1) Normal Good: Ei = positive 2) Inferior Good: Ei = negative ...
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