Econ Ch 5

Price elasticity of demand (midpoint) =

(Q2 - Q1) / [(Q2 + Q1) / 2] over (P2 - P1) / [(P2 + P1)/2]

Cross-price elasticity of demand =

Cross-price elasticity of demand = Percentage change in quantity demanded of good 1 / Percentage change in the price of good 2

Over long time horizons goods have ____ demand

Elastic - Goods tend to have more elastic demand over longer time horizons

Goods with substitutes have ____ demand

Elastic - Goods with close substitutes tend to have more elastic demand because it is easier for consumers to switch from that good to others

Luxuries have ____ demand

Elastic - Luxuries have elastic demands

Narrowly defined markets have ____ demand

Elastic - Narrowly defined markets tend to have more elastic demand because it is easier to find close substitutes for narrowly defined goods

over long time horizons goods have ____ supply

Elastic - supply is usually more elastic in the long run than in the short run

Perfectly Inelastic Demand

Elasticity Equals 0 (vertical demand curve)

Perfectly Inelastic Supply

Elasticity Equals 0 (vertical supply curve)

Unit Elastic Demand

Elasticity Equals 1

Unit Elastic Supply

Elasticity Equals 1

Perfectly Elastic Demand

Elasticity Equals Infinity (horizontal demand curve)

Perfectly Elastic Supply

Elasticity Equals Infinity (horizontal supply curve)

Elastic Demand

Elasticity Is Greater Than 1

Elastic Supply

Elasticity Is Greater Than 1

Inelastic Demand

Elasticity Is Less Than 1

Inelastic Supply

Elasticity Is Less Than 1

Substitutes vs. Complements have ____ cross-price elasticity

For substitutes, the cross-price elasticity is positive, indicating that an increase in the price of A increases the quantity of B demanded. For complements, the cross-price elasticity is negative, indicating that an increase in the price of A reduces the quantity of B demanded.

Income elasticity of demand =

Income elasticity of demand = Percentage change in quantity demanded / Percentage change in income

Broadly defined markets have ____ demand

Inelastic - Broadly defined markets tend to have more inelastic demand because it is harder to find close substitutes for broadly defined goods

Necessities have ____ demand

Inelastic - Necessities tend to have inelastic demands

Normal vs. Inferior goods have ____ income elasticities

Normal goods have positive income elasticities. Inferior goods have negative income elasticities.

Price elasticity of demand (percentage) =

Price elasticity of demand = Percentage change in quantity demanded / Percentage change in price (drop the minus sign)

Price elasticity of supply =

Price elasticity of supply = Percentage change in quantity supplied / Percentage change in price

Flatter vs. Steeper Demand Curve

The flatter the demand curve that passes through a given point, the greater the price elasticity of demand. The steeper the demand curve that passes through a given point, the smaller the price elasticity of demand.

Flatter vs. Steeper Supply Curve

The flatter the supply curve that passes through a given point, the greater the price elasticity of supply. The steeper the supply curve that passes through a given point, the smaller the price elasticity of supply.

Summary

The price elasticity of demand measures how much the quantity demanded responds to changes in the price. Demand tends to be more elastic if close substitutes are available, if the good is a luxury rather than a necessity, if the market is narrowly defined, or if buyers have substantial time to react to a price change. The price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. If quantity demanded moves proportionately less than the price, then the elasticity is less than 1, and demand is said to be inelastic. If quantity demanded moves proportionately more than the price, then the elasticity is greater than 1, and demand is said to be elastic. Total revenue, the total amount paid for a good, equals the price of the good times the quantity sold. For inelastic demand curves, total revenue moves in the same direction as the price. For elastic demand curves, total revenue moves in the opposite direction as the price. The income elasticity of demand measures how much the quantity demanded responds to changes in consumers' income. The cross-price elasticity of demand measures how much the quantity demanded of one good responds to changes in the price of another good. The price elasticity of supply measures how much the quantity supplied responds to changes in the price. This elasticity often depends on the time horizon under consideration. In most markets, supply is more elastic in the long run than in the short run. The price elasticity of supply is calculated as the percentage change in quantity supplied divided by the percentage change in price. If quantity supplied moves proportionately less than the price, then the elasticity is less than 1, and supply is said to be inelastic. If quantity supplied moves proportionately more than the price, then the elasticity is greater than 1, and supply is said to be elastic. The tools of supply and demand can be applied in many different kinds of markets. This chapter uses them to analyze the market for wheat, the market for oil, and the market for illegal drugs.

Relationship between Elasticity and Revenue

When demand is inelastic (a price elasticity less than 1), price and total revenue move in the same direction. When demand is elastic (a price elasticity greater than 1) price and total revenue move in opposite directions. If demand is unit elastic (a price elasticity exactly equal to 1) total revenue remains constant when the price changes.

income elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income

price elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price

cross-price elasticity of demand

a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good

price elasticity of supply

a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price

elasticity

a measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants

total revenue

the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold