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Elastic
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Demand for a good is said to be ____________ if the quantity demanded responds substantially to changes in the price.
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Inelastic
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Demand for a good is said to be ____________ if the quantity demanded responds only slightly to changes in the price.
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Elasticity
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Reflects the many economic, social, and psychological forces that shape consumer tastes.
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General rules about what determines the price elasticity of demand
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1. Availability of close substitutes
2. Necessities versus luxuries
3. Definition of the market
4. Time horizon
2. Necessities versus luxuries
3. Definition of the market
4. Time horizon
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How is price elasticity of demand measured?
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Percentage change in the quantity demanded divided by the percentage change in the price
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price elasticity of demand =
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Percentage change in quantity demanded
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Percentage change in price
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Percentage change in price
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A better was to calculate percentage changes and elasticities
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The midpoint method
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midpoint method formula
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(Q2 - Q1) / ((Q2 + Q1)/2)
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(P2 - P1) / ((P2 + P10)/2)
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(P2 - P1) / ((P2 + P10)/2)
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Demand is elastic when
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the elasticity is greater than 1
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Demand is inelastic when
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the elasticity is less than 1
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Demand is unit elasticity when
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the elasticity is exactly 1
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The flatter the demand curve that passes through a given point
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the greater the price elasticity of demand
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The steeper the demand curve that passes through a given point
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the smaller the price elasticity of demand
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In any market, total revenue is
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P X Q
Price of the good times the quantity of the good sold
Price of the good times the quantity of the good sold
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price elasticity of demand
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determines whether the demand curve is steep or flat
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perfectly inelastic demand:
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Elasticity equals 0
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inelastic demand:
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Elasticity is less than 1
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unit elasticity demand:
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elasticity equals 1
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elasticity demand:
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elasticity is greater than 1
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perfectly elastic demand:
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elasticity equals infinity
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How total revenue changes when price changes: Inelastic demand
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An increase in the price leads to a decrease in quantity demanded and an increase in total revenue
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How total revenue changes when price changes: Elastic demand
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An increase in the price leads to a decrease in quantity demanded and an decrease in total revenue
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when demand is inelastic
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price and total revenue move in the same direction
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when the demand is elastic
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price and total revenue move in opposite directions
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if demand is unit elastic
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total revenue remains constant when the price changes
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Linear demand curve
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slope is constant but elasticity is not
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income elasticity of demand
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is calculated as the percentage change in quantity demanded divided by the percentage change in income
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income elasticity of demand=
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percentage change in quantity demanded
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percentage change in income
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percentage change in income
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cross-price elasticity of demand
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is calculated as he percentage change in quantity demanded of good 1 divided by the percentage change in the price of good 2.
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cross-price elasticity of demand
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percentage change in quantity demanded of good 1
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percentage change in price of good 2
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percentage change in price of good 2
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four major factors that are likely to affect the price elasticity of demand for goods and services
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1. Time
2. Substitutability
3. Definition of the market
4. Necessities and luxuries
2. Substitutability
3. Definition of the market
4. Necessities and luxuries
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The price elasticity of demand
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is a measure of consumer responsiveness to a given change in price.
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Total revenue when demand is elastic.
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There is an inverse relationship between price and total revenue when demand is elastic.
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Total revenue when demand is unitary elastic.
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"Unitary elasticity" means that a given percentage change in price produces the same percentage change in quantity. Thus, at unit elasticity, total revenues will remain constant when price changes.
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Total revenue when demand is inelastic.
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There is a direct relationship between price and total revenue when demand is inelastic.
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