economics 3.2 : elasticity of demand and consumer behavior

• price elasticity of demand - the responsiveness of a change in quantity demanded due to a change in price
• income elasticity of demand - responsiveness of quantity demanded when income changes
• utility - the level of happiness or satisfaction obtained in consuming goods or services
• utils - unit of measurement for utility or happiness
• marginal - additional
• marginal utility - additional urils you get from consuming more of a good
• diminishing marginal utility - the more you consume a certain good, the less satisfaction you get out of it
• elasticity - denotes the responsiveness of one variable to changes in another
• demand is said to be elastic if the percentage change in quantity exceeds the percentage change in price
• an inelastic demand means that the quantity demanded is not very responsive to changes in prices
• 2 variables of price elasticity

  price, quantity demanded
• income elasticity measures how much consumers will buy when their income increases or decreases
• goods with low income elasticities are called inferior goods
• a cross-price elasticity of demand measures the extent to which the quantity demanded of one product responds to a change in the price of another product.
• if the absolute value of income elasticity is greater than 1 then it's considered luxury goods
• the higher the income elasticity, the more sensitive the product is to changes in income
• a normal good has an income elasticity less than
• very responsive to percentage change in prices

  elastic
• not very responsive to percentage change in prices

  inelastic
• same responsiveness to percentage change in price

  unit elastic
• price elasticity > 1

  elastic
• price elasticity < 1​ = inelastic
• price elasticity is equal to 1 = unit elastic
• graph is relatively flat = elastic
• graph is a steep slope = inelastic
• graph is a straight diagonal line = unit elastic
• there is an inverse relationship between price and demand
• $[(Q2-Q1) /Q1]/[(P2-P1)/P1]$


  point elasticity of demand
• what does the point elasticity of demand calculate?

  price elasticity
• as price goes up, the quantity demanded for inelastic goods​ will also increase
• as price goes up, the quantity demanded for elastic goods decrease
• if a merchandise item has a lot of substitutes, then it will be very responsive to price changes or its demand will be elastic.
• perfectly inelastic demand curve - a situation wherein the quantity demanded does not change with changes in price
• perfectly elastic demand - a situation wherein prices are fixed regardless of quantity demanded
• the formula for income elasticity of demand checks for inferior and superior goods
• graph is a straight vertical slope = perfectly inelastic demand
• graph is a straight horizontal slope = perfectly elastic demand
• the demand for commodities with more uses is more elastic than the demand of commodities with fewer uses
• the formula for cross price elasticity tells us whether a product is a substitute or complementary good
• two ways of measuring utility

  cardinal and ordinal