Microeconomics Chapter 6: Elasticity and Total Revenue
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Questions and Answers

What is the calculation for total revenue?

  • Multiplying price per unit by the number of units sold (correct)
  • Subtracting the number of units sold from price per unit
  • Adding the number of units sold and price per unit
  • Dividing price per unit by the number of units sold

    • What is the term for the total amount of funds received by a seller of a good or service?

  • Total Revenue (correct)
  • Demand
  • Supply
  • Price Elasticity

    • What is being measured by total revenue?

  • The total amount of funds received by a seller (correct)
  • The responsiveness of demand
  • The elasticity of supply
  • The relationship between demand and supply

    • What is the title of the chapter that this topic is covered in?

    <p>Chapter 6: Elasticity: The Responsiveness of Demand and Supply</p> Signup and view all the answers

    What is the focus of the learning objective related to this topic?

    <p>The relationship between price elasticity of demand and total revenue</p> Signup and view all the answers

    What is the author of the economics book that this topic is covered in?

    <p>R.Glenn Hubbard</p> Signup and view all the answers

    What is the price elasticity of supply?

    <p>The responsiveness of the quantity supplied to a change in price</p> Signup and view all the answers

    What determines whether supply is elastic or inelastic?

    <p>The ability and willingness of firms to alter the quantity they produce as price increases</p> Signup and view all the answers

    What is the formula to measure the price elasticity of supply?

    <p>(Percentage change in quantity supplied) / (Percentage change in price)</p> Signup and view all the answers

    What happens to the price elasticity of supply when firms are more willing to alter the quantity they produce?

    <p>It becomes more elastic</p> Signup and view all the answers

    What is the difference between the price elasticity of supply and the price elasticity of demand?

    <p>One measures elasticity of supply and the other measures elasticity of demand</p> Signup and view all the answers

    Why is the price elasticity of supply important in economics?

    <p>It helps economists understand the responsiveness of firms to changes in price</p> Signup and view all the answers

    What is the relationship between the price elasticity of supply and the responsiveness of firms to price changes?

    <p>Direct</p> Signup and view all the answers

    What determines the responsiveness of firms to price changes?

    <p>The ability and willingness of firms to alter the quantity they produce as price increases</p> Signup and view all the answers

    What is the definition of cross-price elasticity of demand?

    <p>The percentage change in quantity demanded of one good divided by the percentage change in the price of another good.</p> Signup and view all the answers

    What does a high cross-price elasticity of demand indicate?

    <p>A large response of quantity demanded to a change in the price of another good.</p> Signup and view all the answers

    What is the purpose of Table 6-3 in the chapter?

    <p>To summarize the concept of cross-price elasticity of demand.</p> Signup and view all the answers

    What is the relationship between the cross-price elasticity of demand and the type of goods?

    <p>The cross-price elasticity of demand is higher for substitute goods and lower for complementary goods.</p> Signup and view all the answers

    What is an example of a situation where the cross-price elasticity of demand would be high?

    <p>A 10% decrease in the price of coffee leads to a 20% increase in the quantity demanded of sugar.</p> Signup and view all the answers

    What does a negative cross-price elasticity of demand indicate?

    <p>The goods are complements.</p> Signup and view all the answers

    What is the main difference between cross-price elasticity of demand and own-price elasticity of demand?

    <p>Cross-price elasticity of demand is used to measure the responsiveness of quantity demanded to a change in the price of another good, while own-price elasticity of demand is used to measure the responsiveness of quantity demanded to a change in the price of the same good.</p> Signup and view all the answers

    What is the unit of measurement for cross-price elasticity of demand?

    <p>Percentage</p> Signup and view all the answers

    What is a common challenge that firms face in the short term?

    <p>Increasing the quantity of their product</p> Signup and view all the answers

    What is the main topic of chapter 6 in the provided text?

    <p>The Responsiveness of Demand and Supply</p> Signup and view all the answers

    What is the title of the table that summarizes the price elasticities of supply?

    <p>Table 6-5</p> Signup and view all the answers

    What is the title of the learning objective related to the price elasticity of supply?

    <p>Learning Objective 6.6</p> Signup and view all the answers

    What is the title of the section that discusses the connection between oil prices and supply?

    <p>Why Are Oil Prices So Unstable?</p> Signup and view all the answers

    What is the main topic of the section that discusses polar cases of supply?

    <p>Perfectly Elastic and Perfectly Inelastic Supply</p> Signup and view all the answers

    What is the publisher of the economics textbook from which the content is taken?

    <p>Prentice Hall Business Publishing</p> Signup and view all the answers

    Who are the authors of the economics textbook from which the content is taken?

    <p>R. Glenn Hubbard and Anthony Patrick O’Brien</p> Signup and view all the answers

    What is the main purpose of the table displaying DVD and VHS prices?

    <p>To determine the price elasticity of demand for DVDs</p> Signup and view all the answers

    What was the main concern of movie studios when DVDs were first introduced?

    <p>The price elasticity of demand for DVDs</p> Signup and view all the answers

    Which of the following movies has the lowest DVD price?

    <p>Miss Congeniality</p> Signup and view all the answers

    What is the difference in price between the DVD and VHS of 'The Mummy Returns'?

    <p>$2.00 more for VHS</p> Signup and view all the answers

    What can be inferred from the table about the price of 'The Perfect Storm'?

    <p>The DVD price is lower than the VHS price</p> Signup and view all the answers

    What is the main concept being studied in this scenario?

    <p>Price elasticity of demand</p> Signup and view all the answers

    Why are the prices of different movies being compared?

    <p>To determine the price elasticity of demand</p> Signup and view all the answers

    What is the purpose of the market experiment in this scenario?

    <p>To determine the price elasticity of demand for DVDs</p> Signup and view all the answers

    Study Notes

    The Relationship between Price Elasticity of Demand and Total Revenue

    Total Revenue and Elasticity

    There are three possible scenarios:

    • Elastic Demand: When demand is elastic, a small price decrease will lead to a substantial increase in quantity demanded, resulting in higher total revenue.
    • Inelastic Demand: If demand is inelastic, a small price decrease will lead to a small increase in quantity demanded, resulting in lower total revenue.
    • Unit Elastic Demand: In this case, a small price decrease will lead to a proportionate increase in quantity demanded, leaving total revenue unaffected.

    is the total amount of funds received by a seller of a good or service, calculated by multiplying price per unit by the number of units sold.

    • The relationship between price elasticity of demand and total revenue is important for businesses to understand.

    Determining the Price Elasticity of Demand

    • The price elasticity of demand for DVDs was uncertain when they were first introduced, and movie studios conducted market experiments to determine it.
    • The experiments showed the price elasticity of demand for different DVD titles.

    Cross-Price Elasticity of Demand

    • Cross-price elasticity of demand is the percentage change in quantity demanded of one good divided by the percentage change in the price of another good.

    • It measures how

      Determining the Price Elasticity of Demand

      Understanding the price elasticity of demand is crucial for businesses to make informed decisions about their pricing strategies. When DVD players and DVDs were first introduced, the movie studios were uncertain about the price elasticity of demand for DVDs. To determine this, they conducted market experiments, varying the prices of different DVD titles and observing the subsequent changes in demand. The results of these experiments provided valuable insights into the price elasticity of demand for different DVD titles, enabling the studios to set optimal prices and maximize their revenue.

      Cross-Price Elasticity of Demand

      Cross-price elasticity of demand, on the other hand, measures the responsiveness of the demand for one good to changes in the price of another good. It is calculated as the percentage change in the quantity demanded of one good in response to a percentage change in the price of another good. For instance, if the price of Blu-ray discs increases, the demand for DVDs may also be affected. By understanding the cross-price elasticity of demand, businesses can anticipate how changes in the price of one product will influence the demand for another product, enabling them to develop effective pricing strategies and stay competitive in the market.

      the demand for one good is to changes in the price of another good.

    Summary of Cross-Price Elasticity of Demand

    • The cross-price elasticity of demand can be positive, negative, or zero, depending on the relationship between the two goods.

    The Price Elasticity of Supply and Its Measurement

    • Price elasticity of supply is the responsiveness of the quantity supplied to a change in price, measured by dividing the percentage change in the quantity supplied by the percentage change in the product's price.
    • It measures how responsive the supply of a good is to changes in its price.

    Determinants of the Price Elasticity of Supply Cross-price elasticity of demand measures how responsive the demand for one good is to changes in the price of another good. It's calculated as the percentage change in quantity demanded in response to a percentage change in price of another good. This concept helps businesses anticipate how price changes affect demand for related products, enabling them to develop effective pricing strategies and stay competitive.

    The demand for one good is affected by changes in the price of another good in various ways. For example, if the price of coffee increases, the demand for tea may increase as consumers switch to a substitute product. On the other hand, if the price of cars increases, the demand for gasoline may also increase as people are forced to own cars despite the higher prices. By analyzing the cross-price elasticity of demand, businesses can identify opportunities to bundle products, offer discounts, or adjust their pricing strategies to maximize profits.

    Understanding cross-price elasticity is crucial in making informed decisions about product development, marketing, and pricing. It helps businesses to identify opportunities to expand their product lines, improve their market share, and stay ahead of competitors. By analyzing the cross-price elasticity of demand, businesses can develop targeted marketing campaigns, optimize their pricing strategies, and ultimately drive revenue growth.

    • The price elasticity of supply depends on the ability and willingness of firms to alter the quantity they produce as price increases.
    • Firms may have difficulty increasing the quantity of the product they supply during a short period of time, making supply inelastic.

    Why Are Oil Prices So Unstable?

    • The price elasticity of supply is important for understanding price instability in markets, such as the oil market.

    Polar Cases of Perfectly Elastic and Perfectly Inelastic Supply

    • Perfectly elastic supply means that even a small price change will lead to an infinite quantity supplied.
    • Perfectly inelastic supply means that even a large price change will not lead to a change in the quantity supplied.

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    Understand the relationship between price elasticity of demand and total revenue. Learn how changes in price affect total revenue and demand in different market scenarios.

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