Chapter 5

Revenue

the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold. -PxQ - D curve: area of box from point of D curve.

Price elasticity is closely related to

the slope of the Demand curve. The flatter the demand curve that pass through given point, the greater the price elasticity of demand. The steep the demand curve that passes through a given point, the smaller the price elasticity of demand.

Unit elasticity

when %∆D = %∆P

General Rules that influences price elasticity of demand

-Availability of close substitutes -Necessities versus Luxuries - Definition of the Market

Elasticity and total revenue along a linear demand curve

-Even though the slope of a linear demand curve is constant, the elasticity is not. This is true because the slope is the ratio of changes in the two variables, whereas the elasticity is the ratio of percentage changes in the two variables. -At points with a low price and high quantity, the demand curve is inelastic. -At points with a high price and low quantity, the demand curve is elastic. -The linear demand curve illustrates that the price elasticity of demand need not be the same at all points on a demand curve. A constant elasticity is possible, but it is not always the case.

Other demand elasticities

-income elasticity of demand - cross-price elasticity of demand -

Variety of Supply Curves

-zero elasticity- supply is perfectly inelastic and the supply curve is vertical; quantity supplied is the same regardless of the price - elasticity <1: increase P = increase Qs - elasticity =1: increase P = increase Qs -elasticity >1: increase P = increase Qs -perfectly elastic =∞ : any price above P Qs =∞, at P producers will supply any Q, below P Qs =0

Zero elasticity

Demand is perfectly inelastic, the demand curve is vertical, regardless of the price, Qd stays the same

Time horizon

Good tend to hace more elastic demand over longer time horizons. It allows people to adjust to substitutes.

Availability of close substitutes

Goods with close substitutes tend to have more elastic demand because it is easier for consumers to switch from that good to others

Necessities versus Luxuries

Necessities tend to have inelastic demands, whereas luxuries have elastic demands. -Whether a good is necessity or a luxury depends not on the intrinsic properties of the good but on the preferences of the buyer

Definition of the Market

The elasticity of demand in any market depends on how we draw the boundaries of the market. narrowly defined markets tend to have more elastic demand than broadly defined markets because it is easier to find close substitutes for narrowly defined goods. -Food is broad category, fairly inelastic demand cause no substitutes for food.

price of elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed demanded divided by the percentage change in price. Result is absolute value -Demand for a good is said to be *elastic* if the quantity demanded responds substantially to changes in the price. - Demand is said to be *inelastic* if the quantity demanded responds only slightly to changes in the price - no universal rule -Reflects the change in Qd is proportionately x as large as the change in P -Signs for % ∆Qd and %∆P will always be opposite -if sign is positive, then increase, negative decrease

Cross price elasticity of demand

a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in price of the second good =%∆Good1 / %∆ Good2 -substitutes are goods that are typically used in place of one another. cause demanded move in the same direction, the cross-price elasticity is positive. -complements are goods that are typically used together. the cross-price elasticity is negative

Income elasticity of demand

a measure of how much the quantity of a demanded responds to a change in consumers' income, computer as the = %∆Qd / %∆Income -normal goods: Higher income raises the quantity demanded. Have positive income elasticities -inferior goods: Higher income lowers the quantity demanded. Have negative income elasticities

price elasticity of supply

a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price - Supply of a good is said to be elastic if the quantity supplied responds substantially to changes in the price. - Supply is said to be inelastic if the quantity supplied responds only slightly to changes in the price. -depends on the flexibility of sellers to change the amount of the good they produce -Key determinant: time period being considered: --more elastic in long run -- less elastic in short run = %∆Qs / %∆P

elasticity

a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants

Midpoint method

a way to avoid the problem when using the Standard method from going from A to B then from B to A gives different values. ∆÷ ((x2+x1)÷2) • 100 (Q2-Q1)/[(Q2+Q1)/2] / (P2-P1)/[(P2+P1)/ 2]

Elasticity rising

demand curve get flatter and flatter. From elasticity <1 to elasticity =1 to elasticity >1 to elasticity ->∞

How does total revenue change as one moves along the demand curve?

depends on elasticity of demand: -D = inelastic ( price elasticity <1), P and total revenue move in the same direction: If P increases, total revenue also increases -D = inelastic (price elasticity >1), P and total rev. more in opposite directions: If P increases, total rev. decreases -D = unit elastic (price elasticity =1), total rev. remains constant when the price changes

Variety of demand curves

elasticity >1: D = elastic, quantity moves proportionately > P elasticity <1: D = inelastic, Q moves proportionately < P elasticity >1: %∆Q = %∆P, D = "unit elasticity"

Perfectly elastic

elasticity is a horizontal flat line. Occurs as the price elasticity of demand approaches infinity and D curve becomes horizontal - very small changes in P lead to huge changes in Qd At P consumers will buy any Q, at any price above P demand is 0, any price below P demand is infinite