Microeconomics: Exam 2 (Price Elasticity of Demand and Supply)

measures the "sensitivity" of change in one factor or variable due to a change in a second factor or variable (cause and effect)

1. Quantity demanded
2. Price
3. Quantity supplied
4. Income
5. The quantity of one good due to a change in the price of another good

the ratio of percentage change in the quantity demanded for a good or service due to a percentage change in its price

1. Substitutes
2. Share of budget or income allocation
3. Time

the greater the number of substitutes available for a good or service, then the more likely its demand will be elastic, and vice versa (the fewer substitutes, the demand is inelastic)
-Ex: Water, gas and soda are all inelastic

the greater the amount of income or budget spent for a good or service, the more likely its demand will be elastic, and vice versa (the lower the budget spent, the demand would be inelastic)
-Ex: Housing, automobiles, appliences

initially the demand for a good is inelastic, but with the passage of time, the demand becomes elastic, and vice versa (the demand is elastic, but with the passage of time it becomes inelastic)
-Ex: Movies are elastic in the theatre (you don't care how much you spend), and becomes inelastic over time (after a few months, you won't go to the theatre to see it)

the ratio of percentage change in the quantity demanded due to a percentage change in income

Ey > 0 : means elastic (positive number)
-goods and services which very directly with changes in income (a direct, or positive, relationship)... if you increase income (Y), then the Q demanded increases also, and vice versa
-Ex: Technology, homes, cars, higher quality foods, etc.

Ey < 0 : inelastic
-goods and services which have a negative, or inverse, relationship to changes in income... If income (Y) increases, then the Q demanded decreases, and vice versa
-Ex: Ramen noodles, Sam's Cola, Spam (generic brands)

the ratio of percentage change in the Q demanded for one good (good x) due to a change in the price for another good (good z)
-identifies goods as substitute or complimentary goods

Ec > 0 : means elastic (positive number)
-If the P of one good increases then the Q demanded of another good, a substitute good, will increase and vice versa
-Ex: Tylenol and Aspirin, beef and pork, Nike and Adidas

Ec < 0 : inelastic
-If the P of one good increases then the Q demanded of another good, a complimentary good, will decrease and vice versa
-Ex: Burger and fries, gas and automobiles, socks and shoes

-Demand curve perfectly Inelastic: consumer pays 100%
-Demand curve anything other than perfectly inelastic: consumer and manufacturer both pay