Chapter 6- Elasticity: The Responsiveness of Demand and Supply
If the income elasticity is negative, then the good is _____.
Inferior (Ex: High-fat meat).
Inferior
Inverse
Total Revenue When Demand is Elastic
Inverse
Price Elastic
Larger than 1
Middle of Slope
Unit Elastic
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 in absolute value.
Unit-Elastic Demand
Zero CPE
Unrelated
If the products are _____ , then the cross-price elasticity of demand will be zero.
Unrelated (Ex: Tablets and peanut butter).
Why do we use the MP formula?
We want consistency regarding one price change.
Unrelated
Zero CPE
Midpoint Formula
(Q2-Q1) (P2-P1) ------------ / --------------- (Q1+Q2) (P1+P2) ----- ----- 2 2
Determinants of Price Elasticity of Demand
-Availability of close substitute goods. -The passage of time. -Whether the good is a luxury or a necessity. -The definition of the market. -The share of the good in the consumer's budget.
How a firm finds the Price Elasticity of Demand:
-For a well established product, use historical data to estimate the demand curve. -For a new product, rely on market experiments.
Why do we not always use slope?
Problem is that it is sensitive to different units of measurement.
Cross-Price Elasticity
By how much a change in price for substitutes or compliments will affect my good.
If demand is ____ , then the absolute value of price elasticity is less than 1.
Inelastic
Negative CPE
Compliments
If the products are _____ , then the cross-price elasticity of demand will be negative.
Compliments (Ex: Tablet computers and applications).
The percentage change in the quantity demanded of one good divided by the percentage change in the price of another good.
Cross-Price Elasticity of Demand
Determinants of Price Elasticity of Supply
Depends on the ability and willingness of firms to alter the quantity they produce as price increases.
Availability of Close Substitutes
Direct
Definition of the Market
Direct
Normal
Direct
Passage of Time
Direct
Share of a Good in a Consumer's Budget
Direct
Total Revenue When Demand is Inelastic
Direct
If demand is ____ , then the absolute value of price elasticity is greater than 1.
Elastic
Top left half of Slope
Elastic
Demand is elastic when the percentage change in the quantity demanded is greater than the percentage change in price, so the price elasticity is greater than 1 in absolute value.
Elastic 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 in absolute value.
Inelastic Demand
A measure of how much one economic variable responds to changes in another economic variable.
Elasticity
Slanted Slope
Elasticity is different at every point.
Perfectly Elastic
Elasticity is infinite; quantity demanded is infinitely responsive to price changes.
Perfectly Inelastic
Elasticity is zero; quantity demanded doesn't change as price changes.
Unit Price Elastic
Equal to -1
A measure of the responsiveness of the quantity demanded to changes in income, measured by the percentage change in the quantity demanded divided by the percentage change in income.
Income Elasticity
Bottom right half of Slope
Inelastic
Inferior
Negative
Complements
Negative CPE
What if the income elasticity is zero?
Neutral good; neutral to changes in income
Positive (<1) Positve (>1) Inferior
Normal and Necessity Normal and Luxury Inferior
If the income elasticity is positive and greater than 1, then the good is _____.
Normal and a luxury (Ex: Caviar).
If the income elasticity is positive but less than 1, then the good is _____.
Normal and a necessity (Ex: Bread).
Price Elasticity of Demand Equation
Percentage change in quantity demanded ----------------------------------------------------- Percentage change in price
CPE Equation
Percentage change in the demand of one good -------------------------------------------------------- Percentage change in the price of another good
The case where the quantity demanded is infinitely responsive to price and the price elasticity of demand equals infinity.
Perfectly Elastic Demand
The case where the quantity demanded is completely unresponsive to price and the price elasticity of demand equals zero.
Perfectly Inelastic Demand
If demand is ____ , then the absolute value of price elasticity is equal to infinity.
Perfectly elastic
If demand is ____ , then the absolute value of price elasticity is equal to 0.
Perfectly inelastic
Normal and Necessity
Positive (<1)
Normal and Luxury
Positive (>1)
Substitutes
Positive CPE
The responsiveness of the quantity demanded to a change in price, measured by dividing the percentage change in the quantity demanded of a product by the percentage change in the product's price.
Price Elasticity of Demand
Cutting Price when demand is Inelastic=
Revenue goes down
Cutting price when demand is Elastic=
Revenue goes up
Price Inelastic
Smaller than 1
Positive CPE
Substitutes
If the products are _____ , then the cross-price elasticity of demand will be positive.
Substitutes (Ex: Two brands of tablet computers).
Luxuries versus Necessities
The demand curve for a luxury is more elastic than the demand curve for a necessity.
The total amount of funds a seller receives from selling a good or service, calculated by multiplying price per unit by the number of units sold.
Total Revenue
If demand is ____ , then the absolute value of price elasticity is equal to 1.
Unit Elastic
Price Elasticity of Demand will ____ in value, the more the quantity _____.
decrease, increases
If supply is inelastic, quantity supplied cannot change much in response to the demand change, so price will ________.
rise a lot
If supply is elastic, price will ________.
rise much less
