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elasticity
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A measure of how much one economic variable responds to change in another economic variable
- slopes downward
- slopes downward
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Price Elasticity of Demand
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The responsiveness of the quantity demanded to change in price, measured by dividing the (% change quantity demanded by the % change in the product's price.)
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when flatter slope of elasticity curve
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-smaller slope in absolute value= more elastic
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when steeper slope of elasticity curve
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larger slope in absolute value= less elastic
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Inelastic
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absolute value of PED is less than 1
- quantity demanded is not very responsive to changes in price
- quantity demanded is not very responsive to changes in price
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Unit Elastic
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absolute value of PED is equal to 1
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Elastic
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absolute value of PED is greater than 1
- quantity demanded is very responsive to change in price
- quantity demanded is very responsive to change in price
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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 equals 0.
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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 of elasticity of demand equals infinity.
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determinants of PED
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- availability if close substitutes
- passage of time
- luxuries vs. necessities
- definition of the market
- share of the item in a consumer's budget
- passage of time
- luxuries vs. necessities
- definition of the market
- share of the item in a consumer's budget
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more substitutes avaliable
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more elastic demand
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few substitutes avaliable
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less elastic demand
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Passage of time
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elasticity is higher in the long run than in the short run
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luxuries
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demand for luxury goods is more elastic than demand for necessities or essential goods
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share of good in consumer's budget
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if a good is a small portion of your budget, you will likely not be very sensitive to its price
-inelastic
-inelastic
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total revenue
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the total amount of funds a seller receives from selling a good or service calculated by multiplying price per unit by the number of units solf
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demand for your product is inelastic
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as you decrease the price, you expect to gain few additional customers
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demand for your product is elastic
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as you decrease the price, you expect to gain many additional customers.
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cross-price elasticity of demand
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the percentage change in the quantity demanded of one good divided by the percentage change in price of another good.
- measures the strength of subsitutes or complement relationships between goods
- measures the strength of subsitutes or complement relationships between goods
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cross price elasticity of demand is positive
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substitute goods
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cross price elasticity of demand is negative
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for complementary goods
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Income elasticity of demand
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measure of the responsiveness of the quantity demanded to changes in income, measured by the percentage change in the quantity demanded
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price elasticity of supply
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is responsiveness of the quantity supplied to change in price, measured by dividing the percentage change in the quantity supplied of a product by the percentage change in the product's price
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PES inelastic
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absolute value of PES is less than 1
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PES unit elastic
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absolute value of PES is equal to 1
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PES elastic
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absolute value of PES is greater than 1
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perfectly inelastic supply
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PES equals 0
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Perfectly elastic supply
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PES equals infinity
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Determinants of PES
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- willingness of firms to alter the quantity they produce as price increases
- time period
- time period
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