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elasticity
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a measure of a variable's sensitivity to a change in another variable
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elastic
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Flatter demand curves are more ______
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inelastic
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steeper demand curves are more _____
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reduce, increase
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if demand is elastic, a firm will _____ its total revenues if it raises its price. It will _____ its total revenues if it reduces its price.
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increase, decrease
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if demand is inelastic, a firm will ______ its total revenues if it raises its price. It will ______ its total revenues if it reduces its price.
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price elasticity of demand
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responsiveness of the quantity demanded to a change in price
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price elasticity of demand
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% change in quantity demanded / % change in price
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elastic
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Demand is ______ if its price elasticity of demand is larger (in absolute value) than 1.
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inelastic
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Demand is ______ if its price elasticity of demand is smaller (in absolute value) than 1.
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unit-elastic
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Demand is _________ if the price elasticity of demand is exactly equal to (negative) 1
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midpoint formula for percentage change
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(A-B)/((A+B)/2)
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The availability of close substitutes
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If a product has more substitutes available, it will have more elastic demand. For example, if there are few substitutes for gasoline, its price elasticity of demand is low.
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The passage of time
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Over time, people can adjust their buying habits more easily. Elasticity is higher in the long run than the short run. Example, if the price of gasoline rises ,it takes a while for people to adjust their gasoline consumption.
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Whether the good is a luxury or a necessity
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People are more flexible with luxuries than necessities, so price elasticity of demand is higher for luxuries. Example; many people consider milk and bread necessities; they will buy them every week almost regardless of the price.
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The definition of the market
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The more narrowly defined the market, the more substitutes are available, and hence the more elastic is demand. Example; you might believe there is no good substitute for jeans, so your demand for jeans is very inelastic. But if you consider different brands of jeans, you might be more sensitive to the price of a particular brand.
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The share of a good in a 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. Example, you might buy table salt once a year or less; changes in its price will not affect very much how much you buy.
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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 the price per unit by the number of units sold. Knowing the price elasticity of demand for your product can help to answer these questions.
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Effect of cutting price with different elasticities
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Suppose demand for your product is relatively price inelastic. Customers are not very sensitive to the price of your product. As you decrease the price, you expect to gain few additional customers. Two scenarios may happen, either the few additional customers do not compensate for the lost revenue, so overall revenue goes down. Or, the many additional customers more than compensate for the lost revenue, so overall revenue goes up.
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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 the price of another good. It measures the strength of substitute or complement relationships between goods.
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Income elasticity of demand
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Is a measure of the responsiveness of the quantity demanded to changes in income, measured by the percentage change in the quantity demanded divided by the percentage change in income.
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price elasticity of supply
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the responsiveness of the quantity supplied to a change in price, measured by dividing the percentage change in the quantity supplied of a product by the percentage change in the products price.
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price elasticity of supply
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% change in quantity supplied / % change in price
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perfectly inelastic demand
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quantity demanded is completely unresponsive to price and the price elasticity of demand equals zero
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perfectly elastic demand
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case where the quantity demanded is infinitely responsive to price and the price elasticity of demand equals infinity
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i,ii, and iv
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An elasticity is:
i. a measure of the sensitivity of a variable to a change in another variable
ii. invariant (or insensitive) to the units in which variables are measured
iii. defined as the ratio of the percentage change in the affecting variable to the percentage change in the affected variable
iv. defined as the ratio of the percentage change in the affected variable to the percentage change in the affecting variable
i. a measure of the sensitivity of a variable to a change in another variable
ii. invariant (or insensitive) to the units in which variables are measured
iii. defined as the ratio of the percentage change in the affecting variable to the percentage change in the affected variable
iv. defined as the ratio of the percentage change in the affected variable to the percentage change in the affecting variable
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0.2 percent increase in quantity demanded
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If the price elasticity of demand for a good at the current price is ED = -0.2, then a 1 percent decrease in price will result in a:
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iv
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Consider the market for a normal good. If the market price rises from $30 to $40 and as a result the per-period quantity demanded decreases from 20 to 10 units, then it may be concluded that over this price range:
i. demand has decreased
ii. demand is unit elastic
iii. demand is inelastic
iv. demand is elastic
i. demand has decreased
ii. demand is unit elastic
iii. demand is inelastic
iv. demand is elastic
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ii and iii
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If the demand for a good is elastic with respect to its price, then a:
i. percentage change in price will result in a smaller percentage change in quantity demanded
ii. percentage change in price will result in a greater percentage change in quantity demanded
iii. change in price will cause revenues (or consumer expenditures) to change in the opposite direction
iv. change in price will cause revenues (or consumer expenditures) to change in the same direction
i. percentage change in price will result in a smaller percentage change in quantity demanded
ii. percentage change in price will result in a greater percentage change in quantity demanded
iii. change in price will cause revenues (or consumer expenditures) to change in the opposite direction
iv. change in price will cause revenues (or consumer expenditures) to change in the same direction
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the larger the number of substitutes that exist and the larger the price elasticity of demand
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The more narrowly a product is defined (for example, Coca Cola versus soft drinks in general):
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TR = 80Q - 2Q^2
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Suppose the market demand for a good is described by the demand function P = 80 - 2Q. It follows that the total revenue function relating the total revenues (TR) to the quantity sold (Q) is:
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A and C
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Suppose that at the current prices the price elasticity of demand is 0.32, 1.96, 0.67, and 2.42 for products A, B, C, and D respectively. A one percent decrease in price will decrease total revenue (TR) in which of the following:
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negative and the goods are complements
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Suppose that an 8 percent decrease in the price of good X causes a 6 percent increase in the quantity demanded of good Y. The cross-price elasticity of demand is therefore:
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smaller than the income elasticity of demand for foreign vacation travel
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The income elasticity of demand for food (e.g., measured by daily calories consumed) can reasonably be expected to be:
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the short-run supply curve for housing is less elastic than the long-run supply curve for housing
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The supply of housing within a local housing market (e.g., Orange county) takes a considerable amount of time to increase as a result of an increase in the demand for housing. Defining the short-run as a period of time less than six months and the long-run as a period of time greater than six months, it follows that:
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