Chapter 6 Elasticity

Compliments

an increase in the price of a -------- will lead to a decrease in the quantity demanded so the cross price elasticity of demand will be negative. ex: tablet computers and applications downloaded from online store

Unrelated products

if two products are unrelated then the cross price elasticity of demand will be zero ex: tablet computers and penut butter

Substitute

increase in the price of a ------will lead to an increase in quantity demanded so the cross price of elasticity of demand will be positive ex: two brands of tablet computers

Price Elasticity of Supply

the responsiveness of the quantity supplied to a change in price, measured by dividing the percentage change in the quantity supplied of a product by the percentage change in the products price price of elasticity of supply will be positive

Inferior goods

if the quantity demanded decreases as income increases

Normal Good

if the quantity demanded of a good increases as income increases the the good is a normal good

Determinants of Price Elasticity of Demand

1) Availability of close substitutes to the good 2)The passage of time 3)Whether the good is a luxury good/necessity 4)The definition of the market 5)Share of the good in the consumers budget

Price Elasticity of Demand and Total Revenue

Demand is inelastic a cut in price will decrease total revenue. When demand is elastic a cut in price will increases total revenue.

Inelastic Demand

Demand is inelastic when the percentage change in quantity demanded is less than the percentage change in price, so the price elasticity is less than 1

Cross Price Elasticity of Demand

Percentage change in the quantity demanded of one good divided by the percentage change in the price of another good

Supply curve=horizontal line

Perfectly elastic quantity supplied is infinitely responsive to price, and the price elasticity of supply equals infinity. A small change increase in price cause a very large increase in quantity supplied

Supply curve= vertical line

Perfectly inelastic quantity supplied is completely unresponsive to price, and the price elasticity of supply equals zero Regardless of how much price may increase or decrease the quantity remains the same. ex: parking lots may have a fixed # of spots available but if demand increases the price may increase but the number of spots available is still the same.

Luxuries vs. Necessities

The demand curve for a luxury is more elastic than the demand curve for a necessity ex: the demand for bread is inelastic because bread is a necessity, and the quantity that people buy is not very dependent on its price. Ticket to a concert is a luxury, so the demand for concert tickets is much more elastic than the demand

Share of a good in a consumers budget

The demand for a good will be more elastic the larger the share of the good in the average consumers budget ex: people buy salt&pepper small fraction of their budget so if the price increases it does not have a big change in quantity demanded but if the price of houses/cars ect.. go up theres significant declines in the quantity demanded

Definition of the Market

The more narrowly we define a market, the more elastic demand will be

Passage of Time

The more time passes the more elastic the demand for a product becomes ex: if the price of gas goes up it takes a while for consumers to decide to walk or take public transportation

Determinants of the Price Elasticity of Supply

The supply curve will be increasingly elastic the longer the period of time over which we measure it.

Necessity goods

if the quantity demanded is not very responsive to changes in income, so that a 10 percent increase results in less than a 10 percent increase in the quantity demanded ex: food/clothing

Elastic Demand

demand is elastic when the percentage change in the quantity demanded is greater that the percentage change in price, so the price elasticity is greater than 1

Unit-elastic Demand

demand is unit elastic when the percentage change in quantity demanded is equal to the percentage change in price, so the price elasticity is equal to 1

Elasticity

economist use the concept to measure how one economic variable such as the quantity demanded responds to changes in another economic variable like price.

Normal good: Luxury

good is a luxury if the quantity demanded is very responsive to changes in income, so that a 10 percent increase in income results in more than a 10 percent increase in quantity demanded. ex: expensive jewelry

Elasticity and Revenue Linear Demand Curve

higher prices demand is elastic and at lower prices demand is inelastic.

Income Elasticity of Demand

measure the responsiveness of the quality demanded to changes in income calculated: Percentage change in quantity demanded divided : Percentage change in income

Availability of Close Substitutes

most important determinant of PED If a product has more substitutes available, it will have more elastic demand, if a product has fewer substitutes available, it will have less elastic demand

Revenue

multiplying price per unit by the number of units sold

Price Elasticity of Demand

responsiveness of the quantity demanded to a change in its price, measured by dividing the percentage change in the quantity demanded of a product by the percentage change in the products price is always negative