Chapter 6 - Elasticity: The Responsiveness of Demand and Supply

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In general, what are elastic goods?

goods that are considered luxury goods

In general, what goods are considered inelastic?

goods that are considered necessities

fraction of budget-elasticity

if is a large part of their budget, it is elastic

the total revenue parabola along price elasticity along a demand curve-what increases total revenue

increase in quantity from a decrease in price

total revenue parabola along price elasticity along a demand curve-what decrease total revenue

increase in quantity from a decrease in price decreases total revenue

Price elasticity along along a demand curve

left part is elastic, middle is unit elastic, and right is inelastic

in elastic demands-what is the relationships between price and quantity

percentage change in quantity will exceed the percentage change in price

Perfect elastic demand

pice elasticity of demand is infinite

is price elasticity of demand positive or negative

positive

Unit elastic demand

price elasticity of demand is one, so the percentage change in quantity equals the percentage change in price

Perfectly inelastic demand

price elasticity of demand is zero

total revenue formula

price per unit * quantity sold

inelastic demand (revenue define)

relationship between price and total revenue is positive. Increase in price increases total revenue. Decrease in price decreases total revenue.

inelastic demand-if price goes down, then what happens to revenue

revenue goes down because the percentage change in quantity is smaller than the percentage change in price

elastic demand-if price decreases, then what happens to revenue

revenue goes up because the percentage change in quantity is larger than the percentage in price

inelastic demand-if price goes up, what happens to revenue

revenue increases because the percentage change in quantity is smaller than the percentage change in price

fraction of budget-inelastic

small fraction, then it is inelastic

Be careful with the elasticity with brands

specific brands of coffee might be elastic but the whole entire coffee market may be inelastic

Say a city increases the price it charges for water, the total revenue goes up, what does that tell us

that the demand is inelastic

define total revenue

the money a firm generates from selling its product

Suppose that a music store increases the price of its CDs, and its total revenue drops-what does that tell us

the negative relationship between price and total revenue means that the demand for the store's CD is elastic

elastic demand (revenue define)

the relationship between price and total revenue is negative: An increase in price decreases total revenue; a decrease in price increases total revenue

define price elasticity of demand

the responsiveness of the quantity demanded to a change in price

elastic demand-if price increases, what happens to revenue

total revenue decreases because the percentage change in quantity is larger than the percentage change in price

unit elastic demand-revenue define

total revenue does not vary with price

what the total revenue looks like along price elasticity along a linear demand curve

upside down parabola

passage of time and elasticity

usually, the longer time passes the more elastic the demand

Point elasticity formula

Delta Q/Delta P * P/Q

The relationship between elasticity and revenue

Firms are interested of the effects of price changes on their revenue. The more elastic the demand, the larger the reduction in quantity sold-the worse it is because you are selling less than before

Substitute and elasticity

When there are a wide range of substitutes of goods (like cereal), the demand is elastic. (Ex-cornflakes, if price rices for cornflakes, consumers will choose other substitutes. So the demand is elastic)

Substitutes and inelasticity

When there aren't a wide range of substitutes for goods like insulin, the demand is inelastic (Insulin-since there not too many substitutes for it, an increase in price wouldn't affect consumer behavior too much)

passage of time and inelasticity

as short time passes, the less inelastic the demand

the slope-what does it mean in the price elasticity along a demand curve

equal to the change of quantity by 1 by the price (For ex- a slope of -$2 means a $2 decrease in price increases the quantity demanded by one unit

are specific brands elastic or inelastic?

elastic because loyal customers are very responsive to changes in price of that brand

along the linear demand curve-where is revenue maximized

middle point

necessity vs. luxury good

necessity means inelastic and luxury good is elastic

the relationship between the law of demand and law of supply is

opposite

percentage change in quantity demanded

percentage change in price * Elasticity of demand

in inelastic demand-relationship between price and quantity

percentage change in quantity will be smaller than the percentage change in price

The law of demand tells us that the price and quantity demanded move in opposite direction, therefore that means percentage change in quantity

will always have an opposite sign of the percentage change in price


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