Chapter 5 (Lecture & Reading)

"If you lower the price when you are at the inelastic section of the "demand, price elasticity, and total revenue" you'll see an _____ of the total revenue

Decrease

Price Elasticity of Supply - Shifts/Changes, Idea

Depends on how flexible your business can be

"When the Elasticity < 1 : People are sensitive to a change in price which means curve is ____ as the % change in quantity is ___ than the % change in price, the quantity is not responsive to changes in price and hence the demand curve is ____ which means that we are _____ to price change and will search for a _____

Elastic, larger, not steep, susceptible, substitute

"Unit elasticity = 4 means its is ___ since anything above 1 is elastic which means people are sensitive to ____

Elastic, price change

"Which effects dominate, ____ will give us the answer but essentially it depends on how sensitive people are to ______

Elasticity, price change

(END) Supply is more elastic when

Firms have flexibility

"When the price is lowered asses the

Gain vs lose"

"When you have a price vs. quantity curve that is gradual (non-steep) it means that people have a ______ or _____ curve sensitivity to a price change

High, elastic

Price Elasticity of Demand

How buyers respond to price changes

Price Elasticity of Demand - Rough

How does price change affect consumers, the buyers willingness to pay

Elasticity - Main Question

How good is your substitute and the price of them will determine how sensitive you are price changes

Price Elasticity of Supply

How much sellers change the quantity they produce if the price changes

Price Elasticity (Rough)

How responsive/flexible people are to price changes

Elasticity vs Cross - Price Elasticity of Demand - Equations Difference

In the cross you're comparing two different (complementary/substitute) goods and don't take the absolute value vs in the elasticity you are comparing the same product

"If you lower price when you are at the elastic section of the "demand, price elasticity, and total revenue" you'll see an _____ of the total revenue

Increase

(REVIEW) "When there is a right shift in the demand curve and there's an increase in immigration

Increase in demand

(REVIEW) "When there's a line forming it tells firms that they can ____ which gives companies an incentive to _____ but at the same time ____, which enables a new _____

Increase price, crank up consumption, people will drop out, equilibrium quantity and price

"Highly Inelastic demand means that as the price change increases the total revenue will

Increase"

"The cross-price elasticity is 0 it means that the goods are

Independent

"Change in use is small compared to change in the price then your demand is ____

Inelastic"

"Necessities have _____ demand

Inelastic"

"Demand curve for water for the first gallon is ____but after time it becomes more ____

Inelastic, elastic

"When the Elasticity < 1 : People are not sensitive to a change in price which means curve is ____ as the % change in quantity is ___ than the % change in price, the quantity is not responsive to changes in price and hence the demand curve is ____

Inelastic, smaller, very steep

Income Elasticity of Demand Cross-Price, Elasticity of Demand, Price Elasticity of Supply - Rough

It measures the percent changes in quantity demanded that follows from a 1% price

"You can have a horizontal demand curve when you have ____

Large amount of substitutes

"Supply is elastic= change in quantity suppliers are willing to sell is _____ than the percentage change in price

Larger"

Price Elasticity of Supply - Graphical Trend

Law of supply leads for this graph to be positive

"When you have a price vs. quantity curve that is steep it means that people have a ______ or _____ curve senstiviy to a price change

Low, inelastic

"If demand elastic, a ____ price yields less revenue

Lower

(END) Knowing weather price elasticity is > 1 or < 1 can help business

Maxime revenue

Elasticity - Definition

Measure how much quantities demanded and suppplied respond to changing market conditions

Price Elasticity of Supply - Definition

Measures how responsive sellers are to price changes

"The higher (+) the income elasticity of demand tells us that people are ___ willing to do/take this good (very sensitive)

More

"Factor: How hard it is to search: When it is easy to find (higher accessibility) an alternative, your demand for things become

More elastic"

"Factor: Long periods of time: When you have more time to figure out how to adjust to higher prices your demand for things over time become,

More elastic"

(REVIEW) "Supply curves shifts (same number of buyers and willingness to curve) then the demand curve ____

Moves

Price Elasticity of Demand - Graph Trend

Negative

(END) Income elasticity is positive for ____ and negative for ____

Normal good, inferior goods

"Highly inelastic means that there is _____

Not a good substitute

"If there are no substitutes

your demand is high (inleastic)"

Review - Elasticity (Formula) * Take the absolute value

|% change in quantity demanded/% change in price|

Total Revenue w. Elasticity - Changes, 2 1. Increase price: 2. Decrease price

Receiver higher price/unit but sell fewer units Sell more units

(END) Elasticity measures the

Responsiveness of quantity to other factors

"A higher price yields more _____ if the demand is inelastic

Revenue

(REVIEW) "If there is a shift on the supply via (e.g fracking) the _____ shift will lead firms to ____ however they will have to ____ price

Rightward , increase quantity produced, drop

Importance of Elasticity, Businesses

Sellers set their price and predict their revenue

"Low price elasticity means people are not _____

Sensitive to price change"

"Over time as business have more time to adjust but they would be more

Sensitive to price changes"

(REVIEW) "If we price below equilibrium we would be at a _____

Shortage

"The lower (+) the income elasticity of demand tells us that people are ___ willing to do/take this good (less sensitive)

Somewhat

(END) Demand is more elastic when

Substitutes exists

(END) Cross-price elasticity is positive for ____ and negative for ____

Substitutes, compliments

(REVIEW) "If we price above equilibrium we would be at a _____

Surplus

Price Elasticity of Supply - Rough

The larger % change in quantity supplies = More responsive sellers are to price changes

"The more competing products there are =

The more elastic the demand is for that good"

"Better substitute of a good =

The more willing you'll be to respond to a price rise by buying something else"

"The elasticity of water is categorized as _____ which means people are not sensitive to price change because once you get past one gallon a day (after it becomes less valuable)

Very elastic

High Elasticity = Flexible = Inelastic (Rough) >1

You are more flexible meaning how much you respond to small changes in price

(REVIEW) "To quantify the shortage/surplus

You look at the price and make a horizontal line of difference from edge of supply and demand

Low Elasticity = Inflexible = Elastic (Rough)

Your decisions don't change much as the price changes

Key of Elasticity

Your next best alternative, substitute

Elasticity - Equation

e = Effect (% change in quantity demanded/ Cause (%change in the price)

"Supply is elastic = change in price will lead to a ____

increase in the price of production = increase quantity increases = greater profit"

Cross elasticity serves to

Compare two complementary goods

Price elasticity of demand

Ratio of the change in quantity to the change in price

Review - Cross Elasticity (Formula) <0 : Complements >0 : Substitutes =0 : Unrelates goods

% change quantity of good b/% change quantity of good b

Income Elasticity of Demand - Equation

% change in quantity demanded / % change in income

Cross - Price Elasticity of Demand - Equation

% change in quantity demanded / % change in price of another good

Price Elasticity of Demand - Standard Equation Issue: Depends on the starting point (eliminates directional problem regardless of price increase/decrease)

% change in quantity demanded/% change in price

"To determine the elasticity you need to calculate the

% change in the quantity over the % change in the price"

Price Elasticity of Supply - General Equation

% change in the quantity supplied / % change in the price

"The price elasticity of demand, equation magnitude can be considered as a percentage. For example, 2 means that there was an increase in price by 1% (or __) then the quantity supplied would've ____

(10%), Decreased by 2% (or 20%)

Elasticity - Graph Trends & Definitions

- (Above Point): Elastic - (@ Point) Unit Elastic: The point where the quantity per period = price per unit - (Below Point): Inelastic

"Cross - Price Elasticity of Demand - Types

- Complements are negative - Substitutes are positive

Income Elasticity of Demand - Types

- Normal goods are positive - Inferior goods are negative

"In an income elasticity of demand number line, the necessities are in between ____ while luxuries are ____ while they are both _____ goods

0-1 , +1 , normal

Price Elasticity (Price to Relative Budget) - Types, 2

1. Big-ticket items: Elastic demand 2. Inexpensive items: Inelastic demand

Elasticity of Demand - Calculation, Steps

1. Calculate the change in price 2. Calculate the change in quantity demanded 3. Calculate the absolute value of price elasticity of demand 4. Calculate total revenue 5. Interpret if the demand is elastics/inelastic and how that relates to total revenue and price change

Demand Elasticities (Interdependence Principle) - Concepts, 2

1. Cross-price elasticity of demand 2. Income elasticity of demand

Price Elasticity of Supply - Larger Determinants of Changes, 5

1. For firms that store inventories 2. When inputs are easily available (outsource) 3. For firms with extra capacity 4. When firms can easily enter and exit the market 5. When there's more time to adjust

Factors that can help you figure out how flexible suppliers are

1. More Availability of your inputs 2. More Inventories 3. More capacity 4. Easy entry 5. Time

Price Elasticity (more elastic)- Determinants, 6

1. More competing products (greater elasticity) 2. Specific brands rather (greater elasticity) than broad 3. Things aren't necessities 4. Consumer search/Better information 5. More time to adjust 6. Price relative to budget (varies)

"Effects of price increase, 3

1. More revenue per unit sold (price increase) 2. Fewer units sold 3. Elasticity tells us which effect dominates

"If heinz decides to increase the price by 10% and result demand quantity falls by 30% the demand is ____, total revenue would _____

3>1 = elastics, fall

Price Elasticity of Demand - Definition

A measure of how responsive buyers are to price changes

Cross-Price Elasticity of Demand - Definition

A measure of how responsive the demand of one good is to the price changes of another

Income Elasticity of Demand - Definition

A measure of responsive the demand for a good is to changes in income

"Price elasticity of demand must be assessed using the ____

Absolute value the magnitude of the price

"How do businesses use demand elasticity

Allows firms to forecast how price changes will affect revenues and profit

"In the income elasticity of demand number line, 0 means that the goods

Are not impact by the variation of income

Price Elasticity of Demand - Equation Magnitude Meaning Elasticity > 1 : People ___ sensitive to a change in price Elasticity < 1 : People ___ sensitive to a change in price

Are, Are not

"Price elasticity of demand reflects the

Availability of substitutes

"Demand is elastic = change in price will lead to a _____ change in quantity (____) = ____ revenue

Bigger, decrease, loss"

(END) Price elasticity of demand/supply measures how much

Buyers/sellers respond to price changes

"In between inelastic and elastic parts of the curve, elasticity is "1" where the gain ____ which is a section called the ___

Offsets the cost, unit elastic

"Price and quantity move _____ on the demand side

Oppositely

Price Elasticity of Supply - % Change in Price, Midpoint Equation

P2-P1/(P2+P1)/2) x 100 = %

"Kidney donors when they are unable to get paid would be ______ creating a shortage

Perfectly vertical supply (not elastic) and demand curve

Total Revenue - Equation

Price * quantity

"You take the absolute value when you are talking about: ______

Price elasticity of demand"

"From the law of demand we can use the _______ to determine how much quantity has decrease when the price ____

Price elasticity of demand, increases

"Businesses will lower their price at certain times when they know that their customers are _____

Price sensitive

Price Elasticity of Supply - % Change in Quantity Supplied, Midpoint Equation

Q2-Q1/((Q2+Q1)/2) x 100 = %

(END) Elasticity helps us understand how much the

Quantity demanded and supplied will change when the price changes

(REVIEW) "A shift in the demand (same value of production) will lead to a movement on the

Quantity on the supply curve

Price Elasticity of Demand - MidPoint Equation

Quantity: (Q2-Q1)/[(Q2+Q1)/2] * 100 Price: (P2-P1)/[(P2+P1)/2] * 100