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Elasticity is________?
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responsiveness or sensitivity of one variable to change in another
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Price elasticity of demand (Ed)
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measures the responsiveness in of quanity demanded to a range in price
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Responsive
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Elastic demand
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Unresponsiveness
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inelastic demand
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Elastic demand % formula
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percentage change in quanity demanded(%Qd) / percentage change in price(%P)
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Ed>1
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elastic
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Ed=1
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unitary
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Ed<1
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inelastic
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Total revenue
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the amount that consumers pay and sellers recieve for a good= P x Q
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Elastic-
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price decreases, total revenue increases or price increases, total revenue decreases*
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Inelastic-
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Price decreases and TR decreases or Price increases and TR increases
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Unitary-
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Price decreases and TR unchanged or Price increases and TR remains unchanged
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Determinants of Elasticity of demand
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1.)# of substitutes ( increase in the Ed)
2.)time and the adjustment process ( increase in time increase in Ed, you have more time to be responsive)
3.)Necessity vs Luxury (increase in necessity decrease in Ed, you absolutely need it so ur stuck paying the price they give)
4.) Share of budget spent (increase in budget %, increase in Ed)
2.)time and the adjustment process ( increase in time increase in Ed, you have more time to be responsive)
3.)Necessity vs Luxury (increase in necessity decrease in Ed, you absolutely need it so ur stuck paying the price they give)
4.) Share of budget spent (increase in budget %, increase in Ed)
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example of relatively inelastic:
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life saving medication, water bill you pay
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example of relatively elastic
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fast food restaurant located in the food court of a shopping mall
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Do customers who shop at convenience stores at 3am, have a elasticity demand more or less of those who visit at 3pm?
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less elasticity demand
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Income elasticity of demand
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responsiveness of change in quantity purchased as a result of a change in income
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Income elasticity of demand equation
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(Change in Qd)/(Q1 + Q2) x (I1 +I2)/(Change in income)
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Normal goods are ___________.
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positive (goods we purchase more of when our income rises)
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Inferior goods are ___________.
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negative (goods we purchase less of when our income rise)
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If positive, we are also interested in how large or small the value is:
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Luxuries-purchase a lot more when income rises
Necessity-purchase a little more when income rises
Necessity-purchase a little more when income rises
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Cross elasticity of demand-
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measures how sensitive consumer purchases of one product (X) are to a change in the price of some other
product (Y).
product (Y).
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cross elasticity of demand equation
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Exy= (Change in Qdx)/(Qx1 + Qx2) x (Py1+Py2)/(Change in Py)
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substitutes-
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-cross price elasticity is positive
-the larger the coefficient the greater the
substitutability between the
two products
-the larger the coefficient the greater the
substitutability between the
two products
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complementary-
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cross price elasticity is negative
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Elasticity of supply-
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Measures responsiveness of quantity supplied to a change in price
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Determinants of Es-
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1.)Flexibility of producers- more flexible, increase in Es
2.)Time and the adjustment process- more time, more flexibility
2.)Time and the adjustment process- more time, more flexibility
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elasticity of supply equation
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(Change in Qs)/ (Q1+Q2) x (P1 + P2)/(Change in P)
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...
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Es>1 elastic
Es=1 unitary
Es<1 inelastic
Es=1 unitary
Es<1 inelastic
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Utility is the _____________.
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pleasure or satisfaction obtained from a good or service
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Total utility is the ______________.
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the total amount of satisfaction or pleasure a person derives from a consuming from a specific quantity of a good or service.
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Marginal Utility is the ____________.
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the extra or additional satisfaction a consumer realizes from consuming an additional unit of a product
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how to find marginal utility: equation
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(change in total utility/change in quantity)
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Law of diminishing marginal utility -
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as the consumer obtains more of a particular good, additional (successive) units yield less satisfaction (utility) to the individual consumer.
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What happens when total utility is maximized?
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Consumer equilibrium occurs where total utility is maximized
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Utility maximizing rules:
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MUa/Pa = MUb/Pb
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Whats the the change in quantity demanded is caused by a change in real income(purchasing power)?
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income effect
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Substitution effect is the change in ________ demanded caused by a change in its price relative to substitute
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quantity
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Price is based on.......?
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Marginal Utility not Total Utility.
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Diamond-Water Paradox is the observation that things with the greatest __________ in use sometimes have little value in exchange and things with little value in use sometimes have the greatest value in exchange
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value
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An example of the Diamond Water Paradox is __________?
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tu of water is high bc water is extremely useful. The tu of diamonds is comparatively low bc diamonds are not as useful as water. The mu of water is low, mu of diamonds is high
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