Chapter 6-Microeconomics

Elasticity

a measure of how much one economic variable responds to changes in another economic variable.

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 in absolute value.

Midpoint Formula

ensures that we only have one value of the price elasticity of demand between the dame two points on a demand curve.

PED Calculation

percentage in quantity demanded/percentage change in price

Price elasticity of demand

the responsiveness of the quantity demanded of a good to changes in its price

Price elasticity of supply

the responsiveness of the quantity supplied of a good to changes in its price

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 product's price.

Total Revenue

the total amount of funds it receives from selling a good or service -Calculated by multiplying price per unit by the number of units sold

Unit-elastic Demand

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.

Elastic Demand

when the percentage change in quantity demanded is greater that the percentage change in price, so the price elasticity is greater than 1 in absolute value.

The key determinants of the price elasticity of demand are:

•The availability of close substitutes to the good •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

The share of the good in the consumer's budget

Goods that take only a small fraction of a consumer's budget tend to have less elastic demand than goods that take a large fraction. -The demand for a good will be more elastic the larger the share of the good in the average consumer's budget

The definition of the market

In a narrowly defined market, consumers have more substitutes available. -The more narrowly we define a market, the more elastic demand will be

Whether the good is a luxury or a necessity

Goods that are luxuries usually have more elastic demand curves than goods that are necessities. -The demand curve for a luxury is more elastic than the demand curve for a necessity

The passage of time

It usually takes consumers some time to adjust their buying habits when prices change -The more time that passes, the more elastic the demand for a product becomes

The availability of close substitutes to the good

Most important, how consumers react to a change in the price of a product depends on whether there are alternative products -If a product has more substitute's available, it will have a more elastic demand. If a product has fewer substitutes available, it will have a less elastic demand.

Perfectly Elastic

if a demand curve is a horizontal line. The quantity demanded is infinitely responsive to price, and the price elasticity of demand equals infinity.

Perfectly Inelastic

if a demand curve is a vertical line. The quantity demanded is completely unresponsive to price, and the price elasticity demand equals zero

Income Elasticity of Demand

measures the responsiveness of the quantity demanded to changes in income

Cross-price Elasticity of Demand

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

Necessity

the quantity demanded is not very responsive to changes in income so that a 10 percent increase in income results in less than a 10 percent increase in the quantity demanded

Luxury

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 the quantity demanded.