ECON chapter 6

The Midpoint Formula

(Q2-Q1)/((Q1+Q2)/2) ÷ (P2-P1)/((P1+P2)/2)

Determinants of the price elasticity of demand

- Availability of close substitutes (if a product has more substitutes available, it will have more elastic demand. If the product has fewer substitutes available, it will have less elastic demand. - Passage of time (the more time that passes, the more elastic demand for a product becomes) - Luxuries (the demand curve for a luxury is more elastic than the demand curve for a necessity) - Definition of the Market (the more narrowly we defined a market, the more elastic demand will be) - Share of a good in a consumer's budget (the demand for a good will be more last take the larger the share the good and the average consumer's budget

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. If the products are substitutes, then the cross-price elasticity of demand will be positive. If the products are compliments then the cross-price elasticity of demand will be negative. If the products are unrelated then the cross-price elasticity of demand will be zero.

Price Elasticity of Demand

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

Elasticity

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

Income elasticity of demand

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. If the income elasticity of demand is positive but less than 1 then the good is normal and a necessity. If the income elasticity of demand is positive and greater than 1 the the good is normal and a luxury. If the income elasticity of demand is negative then the good is inferior.

Elastic Demand

Demand is elastic when the percentage change in quantity demanded is greater than the percentage change in price, So the price elasticity is greater than 1 in absolute value. An increase in price reduces revenue. A decrease in price increases revenue.

Inelastic demand

Demand is inelastic when the percentage change in quantity demanded is less than the percentage change in price, so the price less the city is less than 1 in absolute value. An increase in price increases revenue. A decrease in price reduces revenue.

Unit elasticity

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 one an absolute value. An increase or decrease in price does not affect revenue.

Perfectly elastic demand

The case for the quantity demanded is infinitely responsive to price and the price elasticity of demand equals infinity. The curve will be a horizontal line.

Perfectly inelastic demand

The case where the quantity demanded is completely unresponsive to price and the price elasticity of demand equals zero. The curve will be a vertical line.

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 the product by the percentage change in the products price. If supply is elastic then the value price elasticity is greater than 1. If supply is inelastic then the value price elasticity is less than one. If supply is unit elastic, then the value price last to city is equal to one.

Total revenue

The total amount of funds the seller sees from selling a good or service, calculated by multiplying price per unit by the number of units sold.