Chapter 4

|Ed| = 1

unit elastic, % change in Qd = % change in price

Ea,b = 0

unrelated good

A perfectly inelastic demand curve is

vertical

Cross-Price Elasticity of Demand Formula (Good A and Good B)

% change in demand of A/% change in price of B

Income Elasticity of Demand Formula

% change in demand/% change in income

Price Elasticity of Demand Calculation

Ed = % change in Qd/% change in Pd

Cost Relative to Income

- price elasticity of demand determinant - spend a small share of income on a good = less elastic - spend a large share of income on a good = more elastic

Adjustment Time, Supply

- price elasticity of supply determinant - long periods = more elastic - short periods = less elastic

Flexibility of Production Process

- price elasticity of supply determinant - producers produce more of one thing if the price of the product is higher than other products they produce, for example a farmer and his crops

Availability of Inputs

- price of elasticity of supply determinant - more available = less elastic - less available = more elastic

First half of a linear demand curve is

elastic

First half of a total revenue parabola is

elastic

|Ed| >1

elastic, % change in Qd > % change in price

A perfectly elastic demand curve is

horizontal

Elastic: If price decreases and Qd increases, total revenue

increases

Inelastic: If price increases and Qd decreases, total revenue

increases

Second half of a linear demand curve is

inelastic

Second half of a total revenue parabola is

inelastic

|Ed|< 1

inelastic, % change in Qd < % change in price

Ei < 0

inferior good

Mid-Point Method

method that measures percentage change in demand (or supply) relative to a point midway between two points on a curve; used to estimate elasticity

Ei > 0

normal good, 0 to 1 = normal necessity >1 = normal luxury

Ea,b > 0

substitute

Total Revenue

the amount that firm receives from the sale of goods and services; calculated as the quantity sold multiplied by the price paid for each unit

Price Elasticity of Demand

the size of the change in the quantity demanded of a good or service when its price changes

Price Elasticity of Supply

the size of the change in the quantity supplied of a good or service when its price changes

Price Elasticity of Supply Determinants

- adjustment time - flexibility of production process - availability of inputs

What determines price elasticity of demand?

- availability of substitutes - degree of necessity - adjustment time - cost relative to income - scope of the market

How to allocate shortages

- first come, first serve - asses need, then allocate based on assessment - lottery

The price elasticity of demand of a perfectly elastic demand curve is equal to

- infinite

Scope of the Market

- price elasticity of demand determinant - depends on how you define the market - wider = more inelastic - narrower = more elastic

Availability of Substitutes

- price elasticity of demand determinant - if close substitutes are available for a particular good, then the demand for that good will be more elastic than if only distant substitutes are available

Adjustment Time, Demand

- price elasticity of demand determinant - long run = more elastic - short run = more inelastic

Degree of Necessity

- price elasticity of demand determinant - normal goods = more inelastic - luxury goods = more elastic

The price elasticity of demand of a perfectly inelastic demand curve is equal to

0

Cross-Price Elasticity of Demand

a measure of hose the quantity demanded of one good changes when the price of a different good changes

Elasticity

a measure of how much consumers and producers will respond to a change in market conditions

Inelastic: Revenue moves in the direction of

Price

Elastic: Revenue moves in the direction of

Quantity demanded

Income Elasticity of Demand

a measure of how much the quantity demanded changes in response to a change in consumers' incomes

Mid-Point Method Formula for Demand and Supply (replace D with S)

[(Qd2-Qd1)/(Qd2+Qd1/2)]/ [(P2-P1)/(P2+P1/2)]

Marginal Revenue =

change in total revenue/change in quantity

Ea,b < 0

complement

Elastic: If price increases and Qd decreases, total revenue

decreases

Inelastic: If price decreases and Qd increases, total revenue

decreases

Perfectly Elastic Demand

demand for which the demand curve is HORIZONTAL, in a way such that demand could be any quantity at the given price, but drops to zero if the price increases

Perfectly Inelastic Demand

demand for which the demand curve is VERTICAL, in a way such that that the quantity demanded is always the same no mater what the price

Unit-Elastic

demand that has an absolute value of elasticity exactly equal to 1

Elastic

demand that has an absolute value of elasticity greater than 1

Inelastic

demand that has an absolute value of elasticity less than 1