PEco Module 4

• Elasticity is the measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants.
• Price elasticity of demand is how much the quantity demanded of a good responds to a change in the price of that good.
• Price elasticity of demand measures the price-sensitivity of buyers’ demand.
• Price elasticity along a D curve, where P and Q move in opposite directions, makes price elasticity negative.
• All price elasticities are reported as positive numbers.
• If P rises by 10%, then Q falls by 15%.
• The standard method of computing the percentage (%) change is: Going from A to B, the % change in P is ($250–$200)/$200 = 25% and the % change in Q is - 33%.
• The income elasticity of demand measures how much quantity demanded responds to changes in buyers’ incomes.
• When price elasticity of supply is greater than one, supply is “elastic”.
• When price elasticity of supply is less than one, supply is “inelastic”.
• The tools of supply and demand can be applied in many different kinds of markets.
• The cross-price elasticity of demand measures how much demand for one good responds to changes in the price of another good.
• Price elasticity of supply is greater in the long run than in the short run.
• This chapter uses the tools of supply and demand to analyze the market for wheat, the market for oil, and the market for illegal drugs.
• Demand is less elastic in the short run for necessities, broadly defined goods, and goods with few close substitutes.
• Price elasticity of supply equals the percentage change in quantity supplied divided by the percentage change in price.
• The midpoint method of computing % changes is: The midpoint is the number halfway between the start and end values and the average of those values.
• Variety of supply curves can range from perfectly inelastic to perfectly elastic, with perfectly inelastic supply being represented by a vertical supply curve and perfectly elastic supply being represented by a horizontal supply curve.
• Elastic supply means sellers’ price sensitivity is relatively high and elasticity is greater than 1.
• Inelastic supply means sellers’ price sensitivity is relatively low and elasticity is less than 1.
• Unit elastic supply means sellers’ price sensitivity is intermediate and elasticity is 1.
• Education reduces the demand for drugs, causing a fall in quantity and price, resulting in a decrease in total spending on drugs and drug-related crime.
• Price elasticity of supply measures how much the quantity supplied of a good responds to a change in the price of that good, and is calculated by dividing the percentage change in quantity supplied by the percentage change in price.
• Perfectly inelastic supply means sellers’ price sensitivity is none and elasticity is 0.
• Interdiction reduces the supply of drugs, but demand for drugs is inelastic, resulting in an increase in total spending on drugs and drug-related crime.
• Using the midpoint method of computing % changes, the price elasticity of demand for iphones is calculated as: If P = $400, qd = 10,600 and If P = $600, qd = 8,400.
• In inelastic demand, a change in price causes quantity demanded to rise less than 10%, and in elastic demand, a change in price causes quantity demanded to fall by 10% or more.
• Price elasticity of demand = 23.16/40 = 0.58.
• The midpoint method for calculating percentage changes is: % change in P = [(($600 - $400)/$500) ×100], and % change in Qd = [(10,600 – 8,400)/9,500] ×100.
• Active Learning 1 involves using the midpoint method to calculate percentage changes.
• The determinants of price elasticity of demand include the availability of close substitutes.
• Price elasticity of demand is calculated by dividing the % change in quantity demanded by the % change in price.
• The flatter the demand curve, the greater the price elasticity of demand.
• The price elasticity of demand is higher when close substitutes are available.
• Demand is elastic when price elasticity of demand is greater than 1, inelastic when it's less than 1, and unit elastic when it's equal to 1.
• Demand is perfectly inelastic when the demand curve is vertical, and demand is perfectly elastic when the demand curve is horizontal.
• In perfectly inelastic demand, a change in price has no effect on quantity demanded, and in perfectly elastic demand, a change in price has an infinite effect on quantity demanded.
• Demand is perfectly inelastic when price elasticity of demand is equal to 0, and demand is perfectly elastic when it's greater than 1.
• The price elasticity of demand is higher for narrowly defined goods than for broadly defined ones.
• The price elasticity of demand is higher in the long run than in the short run.