Microeconomics Chapter 4 Elasticity

is a measure of how much consumers and producers will respond to a change in market conditions. The concept can be applied to supply or demand. Also, can be used to measure responses to change in the price of a good, change in the price of a related good, or change in income.

descirbes the size of the change in the Quantity demanded of a good or service when its price changes. Measure of consumers sesitivity to price changes. Sensitivity to price changes is measured as more or less elastic.

% Change in Q demanded/Change in P

Measures the percentage change relative to a point midway between the two points Calculates percentage in Quantity Demanded.

Q2-Q1/Average of Q= Q2-Q1/(Q2+Q1/2)

the quantity demanded drops to zero when the price increases even a miniscule amount thus making the demand curve is horizontal.

the quantity demanded is the same no matter what the price thus the demand curve is vertical.

when the absolute value of the price elasticity of demand is greater than 1. A given percentage change in the price of a good will cause an even larger percentage change i nthe quantity demanded.

When absolute value of the price elasticity of demand is less than 1. A given percentage change in price will cause a smaller percentage change in the quantity demanded.

If the absoulute value fof elastictty is exactly 1 that is, if a percentage change in price causes the same percentage change in the quantity demanded.

The amount that firms receives from the sales of goods and sevices, calculated as the quantity sold multiplied by the price paid for each unit.

Is the size of the change the quantity supplied of a good or service when its price changes. Price elasticity of supply measueres producers repsonsiveness to change in pricce, just as price elasticity of demand measures consumers' responsiveness to a change in price.

%change in quantity supplied/% change in price

describe how much demand changes when the price of a different good changes. WHen two goods are substittutes demand is be postive. An increase will cause an increase in quantity demanded . A decrease in price will cause a decrease in quantity demanded. Can also be negative or postive.

When two goods are subsititutes = Postive

When two goodas are complements= Negative

%change in quantity A demanded/%change in price of B

for a good describes how much demand changes in response to changes in consumers incomes.

% change in quantity demanded/ % change in income

Be a negative Number because price and quantity demanded move in opposite directions

WIll cause a negative change in quantity demanded.

will cause a positive change in quantity demanded.

1.)The availability of substitutes
2.)Degree of necessity
3.)Cost realative to income
4.)Adjustment time
5.)Scope Market

When the price of good with a close substitute increases, consumers will buy the substitutes instead. If substitutes are available for particular good, then the demand for that good will be more elastic than if only distant substitutes are available.

When a good is a basic necessity, people will buy it even if its price rises.

All else held equal, if consumers spend a very small share of their incomes on a good, their demand for the good will be less elastic than otherwise.

Goods often have much more elastic demand over the long run than over the short run.

A major Caveat to the determinants just describes is that each depends on how you define the market for a good or service.

1.) Quantity Effect
2.)Price Effect

A price increase will cause a drop in total revenue.

A price increases will raise total revenue.

Income elasticity of demand will be positive and less than 1.

Income elasticity of will be positive and greater than 1.