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Chapter 3 terms
Section 3.1
price elasticity of demand: the responsiveness of a
product’s quantity demanded to a change in its price
elastic demand: demand for which a percentage change in
a product’s price causes a larger percentage change in
quantity demanded
inelastic demand: demand for which a percentage change
in a product’s price causes a smaller percentage change in
quantity demanded
Two extreme cases of demand elasticity.
perfectly elastic demand: demand for which a product’s
price remains constant regardless of quantity demanded
perfectly inelastic demand: demand for which a product’s
quantity demanded remains constant regardless of price (ex.
Demand for insulin)
price taker – has no influence over the market price ex.
Soybean farmer
total revenue: the total income earned from a product,
calculated by multiplying the product’s price by its quantity
demanded - TR = P *Qd
unit-elastic demand: demand for which a percentage
change in price causes an equal change in quantity
demanded
Factors that Affect Price Elasticity of Demand
Portion of consumer incomes – high the portion of
consumer income that goes to purchasing a product the
more responsive to price changes. The demand for big
purchases tends to be more elastic than the demand for
small purchases.
Access to substitutes – if there are many substitutes
for a product, consumers will be more responsive to the
product’s price ( more elastic)
Necessities vs. Luxuries – necessities tend to have
inelastic demand as consumers need to purchase these
products no matter of price. Luxuries tend to be elastic
as consumers do not require these products.
Time – Demand tends to become elastic over time. .
But in the short run consumers do not generally greatly
to price change, but over time consumers will change
their purchasing habits and needs to off-set a change in
the price of a product Ex. Consumers tend to insulate
homes and purchase more efficient heating units as the
price of energy increases.
income elasticity: the responsiveness of a product’s
quantity demanded to a change in average consumer
income
cross-price elasticity: the responsiveness of a product’s
quantity demanded to a change in the price of another
product
3-2 Terms
Price elasticity of supply: the responsiveness of a product’s quantity supplied
to a change in price
Elastic supply: supply for which a percentage change in a product’s price
causes a larger percentage change in quantity supplied
Inelastic supply: supply for which a percentage change in a product’s price
causes a smaller percentage change in quantity supplied
Perfectly elastic supply: supply for which a product’s price remains constant
regardless of quantity supplied
Perfectly inelastic supply: supply for which a product’s quantity supplied
remains constant regardless of price
Immediate run: the production period during which none of the resources
required to make a product can be varied
short run: the production period during which at least one of the resources
required to make a product cannot be varied .
Ex. With Strawberries the short run would be one growing season where the
amount of land can not be increased.
Long run: the production period during which all resources required to make a
product can be varied, and businesses may either enter or leave the industry
Constant-cost industry: an industry that is not a major user of any single resource
Increasing-cost industry: an industry that is a major user of at least one resource
Section 3.3 Excise Taxes
Excise tax: a tax on a particular product expressed as a dollar amount per unit of
quantity
Section 3.4 Price Controls
Price floor: a legal minimum price – most be set above the Market Equilibrium price or it has no
effect. Good for producers but causes a surplus. Prices are higher so consumers pay more.
Price ceiling: a legal maximum price – most be set below Market Equilibrium price or it has no
effect. Great for some consumers as prices are lower but it causes a shortage. Not good for
producers, ends up with less supplied.