Economics exam 1 study guide: price elasticity.

Elasticity of demand (equation)

% change in QD/ % change in price. If the answer is less than one, then it's inelastic. If the answer is more than one, then it is elastic.

Elastic demand

This means quantity is sensitive to a change in price. This means that the elasticity of demand is greater than one. This also means that these items have many substitutes and are mainly luxuries. A big change in quantity as a result in a small change in price. VERY SENSITIVE TO CHANGE.

Unit elasticity of demand

This means that the percent change in q and d are equal to one.

Total revenue

Equation: price X quantity. Inelastic means necessity, which means little to no change in demand. Because of this, that means the total revenue is conditional to price for inelastic. If price goes up then total revenue goes up, and if price goes down, then total revenue goes down. This is why a necessity like gas stations never go on sale because the demand will always be high. As for elastic, this means that lowering the price will increase demand, while increasing price will lower demand. Because of this, if the price increases, then total revenue will decrease, but if price decreases, then total revenue will go up.

Inelastic demand

Example: gasoline. If price is increased, then QD barely changes because it is a necessity. Products with inelastic demand have very little substitutes.

Determinant of elasticity: narrowness of market

Look at an example of food verse Fuji apples. These apples have many different substitutes such as honey crisp apples, gala apples, and etc. Because of this, that means there is more of a change in demand in certain apples if the price goes up, making it elastic (it is also narrower which makes it more elastic). As for food, if there were to be an increase in the price of food in general, then there are really no other substitutes for what you could consume, you cannot consume air or random items to live. Food is a necessity to live, so, therefore, it is inelastic because there would be little change in demand for it.

What are the determinants of price elasticity of demand?

Substitutes, income share, time frame, luxury vs. necessity, AND NARROWNESS OF MARKET

What are the labels on the graph of an elastic demand graph?

Price, quantity, and the slope of the line represents the demand.

Perfect in elasticity

this means that the percent change in q and d is equal to zero, meaning that there is no change in quantity as a result of a change in price. On a graph, this looks like a vertical line.

elasticity of demand

what happens to quantity demand when the price changes