Chapter 6

Price elasticity of supply

A measure of the responsiveness of the quantity of a good supplied to the price of that good. It is the ratio of the percent change in the quantity supplied to the percent change in the price as we move along the supply curve. %change in quantity supplied/ %change in price=price elasticity of supply

Midpoint method

A technique for calculating the percent change. In this approach we calculate the changes in a variable compared with the average, or midpoint, of the starting and final values. (Change in x/Average value of x) times 100

Income elastic

If the income elasticity of a demand for that good is greater than 1

Income Inelastic

If the income elasticity of a demand for that good is positive but less than 1

What factors determine the price elasticity of supply?

The availability of inputs Time that has elapsed since price change The ease of shifting inputs into and out of alternative uses

What factors determine the price elasticity of demand

1. The availability of close substitutes 2 Whether the good is a necessity or a luxury 3. Share of Income Spent on the good 4. Time elapsed since price change

Why does it matter whether the demand is unit elastic, inelastic or elastic?

Because the classification predicts how changes in the price of a good will affect the total revenue earned by producers from the sale of that good.

Cross price elasticity of demand

Between two goods measures the effect of the change in one good's price on the quantity demanded of the other good. It is equal to the percent change in quantity demanded of one good divided by the percent change in the other good's price. %change in quantity of A demanded/ %change in price B

What is the relationship between price and elasticity of demand?

If demand increases for a good is unit elastic (price elasticity of demand is 1), an increase in price does not change total revenue. In this case the quantity effect and the price effect exactly offset each other If demand for a good is inelastic (price elasticity of demand is less than 1), an increase in price increases total revenue. In this case price effect is stronger than quantity effect If demand for a good is elastic (price elasticity of demand is greater than 1) an increase in price decreases total revenue. In this case quantity effect is stronger than price effect.

What is the net effect on total revenue?

If the price effect is stronger then quantity effect, total revenue will increase. If the quantity effect is stronger then the price effect, total revenue will decrease. If the price effect and quantity effect are the same total revenue is unchanged

What is income elasticity of demand?

The percent change in the quantity of a good demanded when a consumer's income changes divided by the percent change in the consumers income. %change in quantity demanded/ %change in income= income elasticity of demand

Unit elastic

The price elasticity of demand=1

What does the price of elasticity of demand tell us?

The price elasticity of demands tells us what happens to total revenue when price changes: its size determine which effect (price or quantity) is stronger.

Price elasticity of demand

The ratio of the percent change in the quantity demanded to the percent change in the price as we move along the demand curve The formula is change in quantity demanded/ change in price x 100

Total revenue

The total value of sales of a good or service. price x quantity sold

what happens to the cross price elasticity of demand when two good are substitutes?

Two goods like hot dogs and hamburgers, the cross price elasticity of demand is positive: A rise in the price of hot dogs increases the demand for hamburgers, a rightward shift of the demand curve for hamburgers. Positive and large

What happens to the cross price elasticity of demand when two goods are complements?

Two goods like hot dogs and hot dog buns are complements. The cross price elasticity is negative: a rise in the price of hot dogs decreases the demand for hot dog buns that is it causes a leftward shift of the demand curve for hot dog buns. Can have positive and negative #s

What is a price effect and a quantity effect?

When a seller raises the price of a good price effect: After price increase, each unit sold sells at a higher price, which raises revenue Quantity effect:After price increase, each unit sold sells at a lower price, which decreases revenue

Perfectly elastic

When any price increases will cause the quantity demanded to drop to zero. When the demand is perfectly elastic, the demand curve is horizontal. Price elasticity of demand >1

Perfectly elastic supply

When even a tiny increase or reduction in the price will lead to very large changes in the quantity supplied, so that the price elasticity of supply is infinite. The perfectly elastic supply curve is horizontal line. If the price falls below that level, the quantity supplied is zero. If the price rises above that level, the quantity supplied is extremely large

What happens when the income elasticity of demand is positive and negative?

When the income elasticity of demand is positive, the good is a normal good. The quantity demanded at any given price increases as income increases When the income elasticity of demand is negative, the good is an inferior good. The quantity demanded at any given price decreases as income increases.

Perfectly inelastic supply

When the price elasticity of supply is zero, so that changes the price of the good have no effect on the quantity supplied. It's vertical

Perfectly inelastic

When the quantity demanded does not respond at all to changes in the price. When demand is perfectly inelastic, the demand curve is a vertical line. The percent change is zero because the percent change in the quantity demanded is zero for any change in price. Price elasticity of demand<1