Economics

• • Measures buyers’ responsiveness to price changes


  price elasticity of demand
• Sensitive to price changes

  Elastic demand
• Large change in quantity demand

  Elastic demand
• Insensitive to price changes

  Inelastic demand
• • Small change in quantity

  Inelastic demand
• Formula for price elasticity of demand


  Percentage change in quantity/Percentage change in price of product
•  Ed > 1


  demand is elastic
• Ed = 1


  demand is unit elastic
• Ed <1 


  demand is inelastic
•  Extreme cases 


  Perfectly inelastic and elastic
• Y axis in graph

  perfectly inelastic demand
• x axis in graph

  perfectly elastic demand
• formula of Total Revenue

  Price x Quantity
• P and TR move in the same direction

  Inelastic demand
• P and TR move in opposite directions

  Elastic demand
• Substitutability: More substitutes


  demand is more elastic
• Proportion of Income: Higher proportion of income 


  demand is more elastic
• Luxuries vs. Necessities: Luxury goods 


  demand is more elastic
• More time available 


  demand is more elastic
• • producers are responsive to price changes

  Elastic supply
• • producers are not responsive to price changes

  Inelastic supply
• • Formula to compute elasticity of supply

  
  

  Percentage Change in Quantity Supplied of Product X / Percentage Change in Price of Product X
• Measures sellers’ responsiveness to

  price changes
• Measures responsiveness of sales to change in the price of another good

  Cross Elasticity of Demand
• Formula to compute price elasticity

  Percentage Change in Quantity

  Supplied of Product X
• Formula of Price Elasticity of Supply

  Percentage Change in Quantity Supplied of Product X / Percentage Change in Price of Product X
• formula for Cross Elasticity of Demand


  Percentage change in quantity demanded of product X /         Percentage change in price of product Y
• positive sign of Exy


  Substitutes
• negative sign


  Complements
• Measures responsiveness of buyers to changes in income

  Income Elasticity of Demand
• Ei positive sign


  Normal goods
• Ei negative sign

  Inferior goods
• Formula for Income elastocity of demand

  Percentage change in quantity demanded / Percentage change in income
• Utility is the satisfaction one gets from consuming a good or service

  Law of Diminishing Marginal Utility
• Law of Diminishing Marginal Utility

  is not same as usefulness? t or f?


  true
• Law of Diminishing Marginal Utility

  is subjective? t or f ?

  true
• Law of Diminishing Marginal Utility

  is difficult to quantity? t or f


  true
• • one unit of satisfaction or pleasure


  Util
• • total amount of satisfaction

  otal utility
• the extra satisfaction from an additional unit of the good

  Marginal utility