Econ 101 Ch. 6 Elasticity

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% change in price

(∆ price / initial price) * 100

% change in quantity demanded

(∆ qty demaded / intial qty demanded) * 100

Complements and PED

Cross PED is negative for complements ex) when hotdog buns become more expensive, hotdog demand decreases DO NOT DROP THE NEGATIVE SIGN

Substitutes and cross PED

Cross PED is positive for substitutes ex) when hotdogs become more expensive, hamburger demand rises

1 < PED < infinity

Elastic; rise in price reduces total revenue Quantity effect dominates price effect

Inelastic

If PED < 1 Demand curve is more steep Increase in price (y variable) generates smaller decrease in qty demanded (x)

Elastic

If PED > 1 Demand curve is flatter Increase in price generates even bigger decrease in quantity

Income inelastic

If income elasticity of demand for that good is positive but less than one When income rises, the demand for income inelastic good rises, but more slowly than income

Income elastic

Income elasticity of demand for that good is greater than 1 When income rises, the demand for income elastic goods rises faster than income

Inferior good

Income elasticity of demand is negative Quantity demanded at any price decreases as income increases

Normal good

Income elasticity of demand is positive Quantity demanded at any price increases as income increases

Income elasticity of demand

Measure of how much the demand for a good is affected by changes in consumers' incomes. Determine if the good is normal or inferior (%∆ in qty demanded) / (%∆ income)

Elasticity using substitutes

More specific good (ex: granny smith apple) has more substitutes, thus it is more elastic More general goods(ex: food) has fewer substitutes and thus more inelastic

UNIT??

No! Elasticity is an unit free measure

0 < PEs < infinity

Ordinary upward sloping supply curve

Total revenue

The total value of sales of a good or service, equal to the price multiplied by the quantity sold TR = Price * quantity sold A square (in the graph) Total revenue curve looks like a dome; total revenue is highest when PED = 1

PED = 1

Unit elastic; change in price has no effect on total revenue

Perfectly elastic

When any price increase will cause the quantity demanded to drop to zero HORIZONTAL demand curve

High PED

When consumers change their quantity demanded by a large percentage compared with the percentage change in price Highly elastic (when PED > 1)

Perfectly elastic supply

When even a tiny increase or reduction in supply will lead to very large changes in the quantity supplied HORIZONTAL supply curve

Perfectly inelastic supply

When the PES is 0, so that changes in the price of the good has no effect on the quantity supplied VERTICAL supply curve

Perfectly inelastic demand

When the quantity demanded does not respond at all to the change in the price. VERTICAL demand line

Price elasticity of supply

A measure of responsiveness of the quantity of a good supplied to the price of that good PES = (%∆ in qty supplied) / (%∆ price)

0 < PED < 1

A rise in price increases total revenue Inelastic Price effect dominates quantity effect

Price effect

After a price increase, each unit sold sells at a higher price, which tends to raise revenue

Quantity effect

After price increase, fewer units are sold, which tends to lower revenue

How PED changes along the demand curve

At lower price, demand is elastic a higher price reduces total revenue. At one point, demand is unit-elastic At higher price, demand is inelastic; a higher price increases total revenue Total revenue curve looks like a dome; total revenue is highest when PED = 1

Cross price Elasticity of Demand

CP PED between two goods measures the effect of the change in one good's price on the quantity demanded of the other food. CP PED = (%∆ in qty A demanded) / (%∆ price B)

Inelastic demand & change in price

PED < 1. A higher price increases total revenue, Price effect is stronger than the quantity effect Price effect dominates the quantity effect; fall in price reduces the total revenue

Unit elastic

PED = 1

Unit elastic demand & change in price

PED = 1. Increase in price does not change the total revenue; the quantity effect

Elastic demand & change in price

PED > 1. An in crease in price reduces the total revenue. The quantity effect is stronger than the price effect. Quantity effect dominates the price effect, so a fall in price increases total revenue

Time elapsed since price change and PED

PED increase as consumers have more time to adjust to price change Long-run PED is higher than short run PED

The availability of close substitutes and PED

PED is high if there are other readily available goods that consumers regard as similar More substitutes - higher PED

Necessity v. Luxury and PED

PED is low for necessity PED is high for luxury goods

Share of income spent on the good and PED

PED is low when spending on a good accounts for a small share of the consumer's income When the good amounts for a significant share of a consumer's spending, the consumer is more responsive - high PED

The availability of inputs and PES

PES tends to be large when inputs are readily available and can be shifted into and out of production at relativity low cost PES is small when inputs are difficult to obtain

Time and PES

PES tends to grow larger as producers have more time to respond to a price change Long run PES is higher than short run PES

PED = Infinity

Perfectly inelastic; any rise in price causes quantity demand fall to 0. Any fall in price leads to an infinite quantity demanded Horizontal demand curve

High price & PED

Raising the price further reduces the total revenue PED changes depending on the current price

Price elasticity of demand

Ratio of the percent change in quantity demanded to the percentage change in price Drop the negative sign! Larger the PED, the more responsive the quantity demanded is to the price

Midpoint method

Technique for calculating the percentage change. Calculate changes in a variable compared with the average (midpoint) of the starting and final values % change in X = (change in X / Average value of X) * 100 Use for both qty and price

Factors that determine the PED

The availability of close substitutes Necessity v. luxury Share of income spent on good Time elapsed since price change

What determines the price elasticity of supply?

The availability of inputs Time


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