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show | the quantity demanded falls
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show | Elasticity
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show | than it does in the short run.
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show | people drive less, and half arises because they switch to more fuel-efficient cars. Both responses are reflected in the demand curve and its elasticity
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show | price elasticity of demand
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show | how willing consumers
are to buy less of the good as its price rises.
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A good with close substitutes tends to have more elastic demand because it is easier for consumers to switch from that good to others. F | show 🗑
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show | A small increase in the price of butter, assuming the price of margarine is held fixed, causes the quantity of butter sold to fall by a large amount. By contrast, because eggs are a food without a close substitute, the demand for eggs is less elastic tha
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Necessities tend to have inelastic demands, whereas luxuries have elastic demands. | show 🗑
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show | people do not dramatically reduce the number of times they go to the doctor, although they might go somewhat less often. By contrast, when the price of sailboats rises, the quantity of sailboats demanded falls substantially. The reason is that most peopl
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markets tend to have more elastic demand than broadly defined markets because it is easier to find close substitutes for narrowly defined goods. | show 🗑
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show | Definition of the market example
food, a broad category, has a fairly inelastic demand because there are no good substitutes for food. Ice cream, a narrow category
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Goods tend to have more elastic demand over longer time hori-zons. When the price of gasoline rises, the quantity of gasoline demanded falls only slightly in the first few months. Over time, however, people buy more fuel-efficient cars, switch to public | show 🗑
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. Economists compute the price elastic-ity of demand | show 🗑
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show | have the opposite sign as the percent-age change in price.
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show | negative numbers
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show | Positive numbers
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show | midpoint method
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When demand is inelastic ________ price and total revenue move in the same direction: If the price increases, total revenue also increases | show 🗑
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show | a price elasticity greater than one
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If demand is unit elastic ________ total revenue remains constant when the price changes | show 🗑
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show | divide the change by the initial level.
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show | elastic
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Demand is considered ________ when the elasticity is less than one, which means the quantity moves proportionately less than the price. | show 🗑
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show | the percentage change in quantity equals the percentage change in price, and demand is said to have unit elasticity. Because the price elasticity of demand measures how much quantity demanded
responds to changes in the price, it is closely related to th
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the greater the price elasticity of demand | show 🗑
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show | Inelastic curves, such as in panel (a) of Figure 1, look like the letter I. This is not a deep insight, but it might help on your next exam.
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When studying changes in supply or demand in a market, one variable we often want to study is | show 🗑
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show | total revenue definition
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In any market, total revenue is | show 🗑
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: An increase in the price cause | show 🗑
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. Because demand is elastic | show 🗑
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the impact of a price change on total revenue (the product of price and quantity) depends on | show 🗑
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show | constant slope
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show | rise / run ” which here is the ratio of the change in price (“rise”) to the change in quantity (“run”).
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show | two variables
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show | not
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show | the demand schedule in the table and the midpoint method.
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show | inelastic
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At points with a high price and low quantity, the demand curve is | show 🗑
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show | the ratio of percentage changes in the two variables
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At points with a low price and high quantity, | show 🗑
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At points with a high price and low quantity, | show 🗑
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When the price is low and consumers are buying a lot | show 🗑
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show | the same $1 price increase and two-unit reduction in quantity demanded constitute a small percentage increase in the price and a large percentage decrease in quantity demanded, resulting in a large elasticity
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show | for instance, demand is inelastic and a price increase to $2 raises total revenue.
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show | reduces total revenue.
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show | exactly unit elastic and total revenue is the same at these two prices.
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show | , but it is not always the case, and it is never the case for a linear demand curve.
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a measure of how much the quantity demanded of a good responds to a change in consumers’ income, computed as the percentage change in quantity demanded divided by the percentage change in income | show 🗑
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Higher income raises the quantity demanded Because quantity demanded and income move in the same direction, normal goods have positive income elasticities. | show 🗑
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Higher income lowers the quantity demanded. Because quantity demanded and income move in opposite directions, inferior goods have negative income elasticities | show 🗑
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show | Engel’s Law (named after the statistician who discovered it):
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show | The cross-price elasticity of demand
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show | the two goods are substitutes or complements
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are goods that are typically used in place of one another, such as ham-burgers and hot dogs | show 🗑
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An increase in hot dog prices induces people to grill more hamburgers instead. | show 🗑
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goods that are typically used together, such as computers and software. In this case, the cross-price elasticity is negative, indicating that an increase in the price of computers reduces the quantity of software demanded | show 🗑
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show | . The price elasticity of supply
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show | the flexibility of sellers to change the amount of the good they produce. For example, beachfront land has an inelastic supply because it is almost impossible to produce more of it.
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show | elastic supplies because firms that produce them can run their factories longer in response to higher prices.
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show | me period being considered. Supply is usually more elastic in the long run than in the short run.
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show | easily change the size of their factories to make more or less of a good. Thus, in the short run, the quantity sup-plied is not very responsive to changes in the price.
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show | the supply curve gets flatter, which shows that the quantity supplied responds more to changes in the price
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show | perfectly elastic This occurs as the price elasticity of supply approaches infinity and the sup-ply curve becomes horizontal, meaning that very small changes in the price lead to very large changes in the quantity supplied.
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show | not constant but varies over the sup-ply curve.
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show | high, indicating that firms respond substantially to changes in the price. In this region of the supply curve, firms have additional capacity for production, such as plants and equipment that are idle for all or part of the day
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show | firms begin to reach capacity. Once capacity is fully used, further increases in production require the construction of new plants. To induce firms to incur this extra expense, the price must rise substantially, so supply becomes less elastic.
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Because firms often have a maximum capacity for production, | show 🗑
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show | total revenue rises or falls
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show | a decrease in price causes total revenue to fall.
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This analysis of the market for farm products also explains a seeming paradox of public policy | show 🗑
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show | farmers as a group receive greater total revenue if they supply a smaller crop to the market.
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show | how supply and demand can
behave differently in the short run and in the long run
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In the short run | show 🗑
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show | inelastic because buying habits do not respond immediately to changes in price
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producers of oil outside OPEC respond to high prices by | show 🗑
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show | each farmer is a price taker.
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Because the demand curve for oil is ________ elastic in the long run, OPEC's reduction in the supply of oil had a ________ impact on the price in the long run than it did in the short run | show 🗑
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over time, technological advances increase consumers’ incomes and reduce the price of smartphones. | show 🗑
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