C211 wgu Microeconomic Principles (Mankiw Chapters 4 & 5)

Can you summarize the 3 types of elasticity, their equations, purpose and outcomes?

1. 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.

Can you summarize the 3 types of elasticity, their equations, purpose and outcomes?

2. 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. It 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 and supply is said to be inelastic. If quantity supplied moves proportionately more than the price, then the elasticity is greater than and supply is said to be elastic.

Can you summarize the 3 types of elasticity, their equations, purpose and outcomes?

3. 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.

Explain the effect an income change might have on shifting the demand curve?

A lower income means that you have less to spend in total, so you would have to spend less on some—and probably most—goods. If the demand for a good falls when income falls, the good is called a normal good. If the demand for a good rises when income falls, the good is called an inferior good.

What is the price elasticity of demand? Explain the distinctions between elastic, inelastic, and unit-elastic.

Because the price elasticity of demand measures how much quantity demanded responds to changes in the price, it is closely related to the slope of the demand curve. The following rule of thumb is a useful guide: 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. Unit-elastic is where any % change in price causes an equal % change in quantity. Elasticity = 1 Perfectly inelastic has a vertical demand curve and equals 0. Regardless of the price, the demand stays the same. As the elasticity rises, the demand curve gets flatter and flatter. Inelastic is < 1.Perfectly elastic has a horizontal demand curve approaching infinity, reflecting the fact that very small changes in price lead to huge changes in the quantity demanded. Elastic is > 1.

What two results stem from income elasticity? Why is this important to an economist?

For higher incomes, normal goods have positive income elasticities because quantity demanded and income move in the same direction. Inferior goods have negative income elasticities because quantity demanded and income move in opposite directions.

What other factors might influence the position of the demand curve?

Taste or preference, expectations about the future, and number of buyers.

What is cross-price elasticity? How is this defined and what result comes from this measure of elasticity?

The cross-price elasticity of demand measures how much the quantity demanded of one good responds to changes in the price of another good. It is calculated as the percentage change in quantity demanded of good 1 divided by the percentage change in the price of good 2. Whether the cross-price elasticity is a positive or negative number depends on whether the two goods are substitutes or complements. Substitutes move in the same direction, so the cross-price elasticity is positive. (hotdogs and hamburgers) Complements are goods that are typically used together, the cross-price elasticity is negative. (computers and software)

What is income elasticity and how is it measured?

The income elasticity of demand measures how much the quantity demanded responds to changes in consumers' income. Higher income raises the quantity demanded, normal goods have positive income elasticities. Necessities, such as food and clothing, tend to have small income elasticities because consumers choose to buy some of these goods even when their incomes are low. It is calculated as the percentage change in quantity demanded divided by the percentage change in income.

What numerical value determines whether or not a product/service is considered price elastic versus inelastic?

The price elasticity of demand for any good measures how willing consumers are to buy less of the good as its price rises. Goods with close substitutes tend to have more elastic demand because it is easier for consumers to switch from that good to others. Necessities tend to have inelastic demands, whereas luxuries have elastic demands. The elasticity of demand in any market depends on how we draw the boundaries of the market. Narrowly defined markets tend to have more elastic demand than broadly defined markets because it is easier to find close substitutes for narrowly defined goods. (ice cream - easy substitute for dessert) (food does not have a good substitute) Goods tend to have more elastic demand over longer time horizons. Gasoline - minor demand falls initially but over time people buy more fuel-efficient cars, switch to public transportation, or move closer to work, so gas demand decreases dramatically over time.

Explain how the price of related goods is related to changes in the demand curve?

When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes. Substitutes are often pairs of goods that are used in place of each other. When a fall in the price of one good raises the demand for another good, the two goods are called complements. Complements are often pairs of goods that are used together.