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elasticity
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a measure of how much economic value responds to another economic variable, a measure of the responsiveness quantity demanded or quantity supplied is to a change in one of its determinants
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price elasticity of demand
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the responsiveness of the quantity demanded to a change in price, measured by :
= %change in quantity demanded/ % change in price
= %change in quantity demanded/ % change in price
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elastic demand
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demand is _______ when the percent change in quantity demanded is greater than the percent change in price elasticity is greater than 1
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inelastic demand
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demand is ______ when the percentage change in quantity demanded is less than the percentage change in price, so the price elasticity is less than 1 in absolute value
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unit-elastic demand
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demand is _______ when percentage change in quantity demanded is equal to the percentage change in price, so the price elasticity = 1 in absolute value.
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midpoint formula
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(Q2-Q1) (P2-P1)
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((Q1+Q2)/2) ( (P1+P2)/2)
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((Q1+Q2)/2) ( (P1+P2)/2)
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perfectly inelastic demand
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the case where the quantity demanded is completely unresponsive to price and the price elasticity of demand equal zero (vertical line)
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perfectly elastic demand
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the case where the quantity demanded is infinitely responsive to price, and the price elasticity of demand equals infinity (horizontal line) (infinitely elastic)
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determinants of price elasticity of demand
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availability of close substitutes, passage of time, luxury vs necessity, definition of market, share of good in a consumer's budget
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(determinant) availability of close substitutes
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in general if a product has more substitutes available, it will have more elastic demand
if a product has less substitutes available, it will have less elastic demand
if a product has less substitutes available, it will have less elastic demand
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(determinant) passage of time
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the more time that passes, the more elastic the demand for a product becomes
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(determinant) luxury vs necessity
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the demand curve for a luxury is more elastic than that of a necessity item
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(determinant) definition of market
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the more narrowly we define a market, the more elastic demand will be
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(determinant) share of a good in a consumer's budget
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the demand for a good will be more elastic the larger the share of the good in the average consumer's budget
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total revenue
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the total amount of funds received by a seller of a good or service, calculated by multiplying price per unit by number of units sold
(price of unit) x (# of units)
(price of unit) x (# of units)
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demand is elastic then an increase in price
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reduces revenue because the decrease in quantity demanded is proportionally greater than the increase in price
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demand is elastic then an decrease in price
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increases revenue because the increase in quantity demanded is proportionally greater than the increase in price
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demand is inelastic than an increase in price
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increases revenue because the decrease in quantity demanded is proportionally smaller than the increase in price
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demand is inelastic than a decrease in price
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reduces revenue because the increase in quantity demanded is proportionally smaller than the decrease in price
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demand is unit elastic then an increase in price
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does not affect revenue because the decrease in quantity demanded is proportionally the same as the increase in price
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demand is unit elastic then a decrease in price
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does not affect revenue because the increase in quantity demanded is proportionally the same as the decrease in price
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cross price elasticity of demand
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the percentage change in quantity divided by the percentage change in the price of another good
= % change in QD of one good
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% change in price of another good
= % change in QD of one good
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% change in price of another good
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positive
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if the products are substitutes then the cross-price elasticity demand will be...
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negative
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if the products are complements then the cross-price elasticity demand will be...
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zero
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if the products are unrelated then the cross-price elasticity demand will be...
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income elasticity of demand
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a measure of the responsiveness of a quantity demanded to changes in income, measured by the percentage change in quantity demanded divided by the percentage change in income
= % change in QD
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% change in income
= % change in QD
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% change in income
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income elasticity of demand is positive but less than 1
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...then the good is normal and a necessity, i.e. bread
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income elasticity of demand is positive and greater than 1
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...then the good is normal and a luxury, i.e. caviar
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income elasticity of demand is negative
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...then the good is inferior
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price elasticity of supply
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the responsiveness of quantity supplied to a change in price, measured by the percentage change in quantity supplied divided by the percentage change in price
= % change in QS
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% change in price
= % change in QS
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% change in price
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supply is elastic
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...then the value of price elasticity is greater than one
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supply is inelastic
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...then the value of price elasticity is less than one
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supply in unit elastic
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...then the value of price elasticity is equal to one
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supply is perfectly elastic
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...then the value of price elasticity is equal to infinity
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supply is perfectly inelastic
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...then the value of price elasticity is equal to zero
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