Chapter 4 - ECON 0100

Cards (43)

  • responsiveness of quantity demanded of a good to change in terms of price of the slope of the demand curve
    steep = price changes a lot

    flat = prices barey changes
  • price elasticity of demand
    a units-free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buying plans remain the same
  • Calculating Price Elasticity of Demand

    % change in quantity demanded / % change in price


    use midpoint
    ex: 70-80, do 10/75

    look at magnitude or absolute value (disregard negative)
  • average price
    average of the initial and new price
  • average quantity demanded
    average of the initial and new quantity
  • average price and quantity
    By using the average price and average quantity,we get the same elasticity value regardless of whether the price rises or falls
  • percentages and proportions
    The ratio of two proportionate changes is the same as the ratio of two percentage changes.- %DQ / %DP = DQ / DP
  • units free measure
    Elasticity is a ratio of percentages, so a change in the units of measurement of price or quantity leaves the elasticity value the same
  • inelastic and elastic demand
    demand can be inelastic, unit elastic, or elastic (0-infinity)
  • perfectly inelastic demand
    If the quantity demanded doesn't change when the price changes, the price elasticity of demand is zero
  • unit elastic demand
    the percentage change in quantity demanded equals the percentage change in price; the resulting price elasticity has an absolute value of 1.0 (on a linear demand curve it is always the midpoint)
  • inelastic demand

    if the percentage change in quantity demanded is smaller than the percentage change in price (on a linear demand curve it is always below the midpoint)

    <1
  • elastic demand
    if the percentage change in the quantity demanded is greater than the percentage change in price (on a linear demand curve it is always above the midpoint)

    >1
  • perfectly elastic demand
    If the percentage change in the quantity demanded is infinitely large when the price barely changes

    infinity
  • factors that influence the elasticity of demand
    1. The closeness of substitutes
    2. The proportion of income spent on the good
    3. The time elapsed since the price change
  • closeness of substitutes
    The closer the substitutes for a good or service,the more elastic is the demand for the good or service.

    Necessities, such as food or housing, generally have inelastic demand.

    Luxuries, such as exotic vacations, generally have elastic demand
  • proportion of income spent on the good

    The greater the proportion of income consumers spend on a good, the larger is the elasticity of demand for that good
  • time elapsed since price change
    The more time consumers have to adjust to a price change, or the longer that a good can be stored without losing its value, the more elastic is the demand for that good
  • total revenue and elasticity
    total revenue from the sale of a good or service equals the price of a good multiplied by the quantity sold

    when the price changes, total revenue also changes

    but a rise in price doesn't always increase total revenue
  • factors for change in total revenue
    If demand is elastic, a 1 percent price cut increases the quantity sold by more than 1 percent, and total revenue increases.

    If demand is inelastic, a 1 percent price cut increases the quantity sold by less than 1 percent, and total revenues decreases

    If demand is unit elastic, a 1 percent price cut increases the quantity sold by 1 percent, and total revenue remains unchanged
  • total revenue test
    a method of estimating the price elasticity of demand by observing the change in total revenue that results from a change in the price, when all other influences on the quantity sold remain the same

    -price cut increase total revenue, demand is elastic
    -price cut decreases total revenue, demand is inelastic
    -price cut leaves total revenue unchanged, demand is unit elastic

    -price rise increase total revenue, demand is inelastic
    -price rise decreases total revenue, demand is elastic
    -price rise leaves total revenue unchanged, demand is unit elastic
  • your expenditure and your elasticity
    If your demand is elastic, a 1 percent price cut increases the quantity you buy by more than 1 percent and your expenditure on the item increases.

    If your demand is inelastic, a 1 percent price cut increases the quantity you buy by less than 1 percent and your expenditure on the item decreases.

    If your demand is unit elastic, a 1 percent price cut increases the quantity you buy by 1 percent and your expenditure on the item does not change
  • income elasticity of demand
    measures how the quantity demanded of a good responds to a change in income, ceteris paribus
  • calculating the income elasticity of demand

    % change in quantity demanded / % change in income
  • income and elasticity of demand
    If the income elasticity of demand is greater than 1, demand is income elastic and the good is a normal good.

    If the income elasticity of demand is greater than zero but less than 1, demand is income inelastic and the good is a normal good.

    If the income elasticity of demand is less than zero (negative) the good is an inferior good
  • cross elasticity of demand
    measure of the responsiveness of demand for a good to a change in price of a substitute or a complement, ceteris paribus
  • calculating the cross elasticity of demand
    % Change in Quantity Demanded / % Change in Price of Substitute or Complement
  • cross elasticity and demand
    The cross elasticity of demand for
    -a substitute is positive.
    -a complement is negative.
  • elasticity of supply
    measures the responsiveness of the quantity supplied to a change in the price of a good, ceteris paribus
  • calculating the elasticity of supply
    % change in quantity supplied/% change in price
  • perfectly inelastic
    supply curve is vertical and elasticity is 0
  • unit elastic
    supply curve is linear and passes through origin (slope is irrelevant) and elasticity is 1
  • perfectly elastic
    supply curve is horizontal and elasticity is infinite
  • factors that influence the elasticity of supply
    Resource substitution possibilities

    Time frame for supply decision
  • resource substitution possibilities

    the easier it is to substitute among the resources used to produce a good or service, the greater is its elasticity of supply
  • time frame for supply decicision
    The more time that passes after a price change,the greater is the elasticity of supply.
    -Momentary supply
    -Short-run supply
    -Long-run supply
  • momentary supply
    perfectly inelastic, quantity supplied immediately following a price change is constant
  • short run supply
    Somewhat elastic supply
  • long run supply
    most elastic supply (perfectly elastic)
  • demand and price cuts and rises
    Demand is elastic if a price cut increases total revenue

    Demand is inelastic if a price rise increases total revenue

    Demand is unit elastic if a price rise or price cut leaves total revenue unchanged.