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Price Elasticity of Demand
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The responsiveness or sensitivity of consumers to a price change
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MIDPOINT FORMULA
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Ed=Change in Q/(sum of Q/2) / Change in Price/(Sum of prices/2)
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DEMAND IS (relatively) ELASTIC WHEN...
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Ed greater than 1
Qd changes by a larger % than does price
If price increases TR decreases
If price decreases TR increases
Qd changes by a larger % than does price
If price increases TR decreases
If price decreases TR increases
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DEMAND IS (relatively) INELASTIC WHEN...
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Ed is less than 1
Qd changes by a smaller % than does price
If price increases TR increases
If price decreases TR decreases
Qd changes by a smaller % than does price
If price increases TR increases
If price decreases TR decreases
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UNIT ELASTICITY
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Ed is exactly 1
Qd changes by same % than does price
If price increases TR unchanged
If price decreases TR unchanged
Qd changes by same % than does price
If price increases TR unchanged
If price decreases TR unchanged
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Perfectly Inelastic
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Extreme situation where a price change results in no change watsoever in the quantity demanded
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Perfectly Elastic
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Extreme situation where a small price reduction causes buyers to increase their purchases from zero to all they can obtain, the elasticity coefficient is infinite
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TOTAL REVENUE (TR)
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Total amount the seller receives from the sale of a product in a particular time period
TR= P x Q
TR= P x Q
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PRICE ELASTICITY OF SUPPLY
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Ed= % change in Q supplied of product X/ % change in P supplied of product X
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Market Period
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the period that occurs when the time immediately after a change in market price is too short for producers to respond with a change in quantity supplied
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Short Run
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Period of time too short to change plat capacity but long enough to use the fixed sized plant more or less intensively
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Long Run
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Time period long enough for firms to adjust their plant sizes and for new firms to enter (or existing ones to leave) the industry
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CROSS ELASTICITY OF DEMAND
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Measure ow sensitive consumer purchases of one product (X) are to change in the price of some other product (Y)
Exy=% change in Qd of product X / % change in P of product Y
Exy=% change in Qd of product X / % change in P of product Y
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Substitue Goods
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If cross elasticity demand is positive, meaning that sales of X move in the same direction as a change in the price of Y, the X and Y are substitute goods.
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Complementary Goods
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When cross elasticity is negative, we know that X and Y 'go together', an increase in the price of one decreases the demand for the other.
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Independent Goods
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the price of one good does not affect the demand of the other (butter/golf balls)
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