sg05 - C H A P T E R 5 D E M A N D A N D E L A S T I C I T...

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C H A P T E R 5 D E M A N D A N D E L A S T I C I T Y IMPORTANT TERMS AND CONCEPTS (Price) Elasticity of Demand Elastic, Inelastic, and Unit-Elastic Demand Curves Income Elasticity of Demand Complements Substitutes Cross Elasticity of Demand Shift in a Demand Curve LEARNING OBJECTIVES After completing this chapter, you should be able to: compute the elasticity of demand, given data from a demand curve. describe how various factors affect the elasticity of demand. explain why the price elasticity of demand is a better measure of the price sensitivity of demand than the slope of the demand curve. explain how the impact of a change in price on total revenue and consumer expenditures depends on the price elasticity of demand. explain how the concept of cross elasticity of demand relates to the concepts of substitutes and complements. explain how factors other than price can affect the quantity demanded.
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CHAPTER REVIEW The material in this chapter offers an intensive look at demand curves. Demand curves provide important information for analyzing business decisions, market structures, and public policies. An important property of demand curves is the responsiveness of demand to a change in price. If a firm raises its price, how big a sales drop is likely? If a firm lowers its price, how large an increase in sales will there be? To avoid problems with changing units, economists find it useful to measure these changes as percentages. If, for a given change in price, we divide the percentage change in the quantity demanded by the percentage change in the price producing the change in quantity and ignore the negative sign, we have just computed the price ___________________ of _________________. Remember, this calculation ignores minus signs and uses the average price and quantity to compute percentage changes. It is useful to know the elasticity properties of certain, special types of demand curves. If the demand curve is truly a vertical line, then there is no change in the quantity demanded following any change in price, and the elasticity of demand is _____________. (No demand curve is likely to be vertical for all prices, but it may be for some.) The other extreme is a perfectly horizontal demand curve where a small change in price produces a very large change in the quantity demanded. Such a demand curve implies that if price declines, even just a little, the quantity demanded will be infinite, while if the price rises, even a little, the quantity demanded will fall to zero. In this case, a very small percentage change in price produces a very large percentage change in the quantity demanded, and the price elasticity of demand is, in the limit, _________________. The price elasticity of demand along a negatively sloped straight-line demand curve (is constant/changes ). One of the Basic Exercises illustrates just this point.
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