Elasticity and Producer/Consumer Surplus
Mid-Point Formula
([∆ quantity demanded]/[average quantity demanded]) / ([∆ price]/[average price])
Inelastic Supply
A change in price leads to a less than proportional change in quantity supplied (Eq < 1)
Elastic Supply
A change in price leads to a more than proportional change in quantity supplied (Eq > 1)
Availability of Close Substitutes
A good with close substitutes is likely to have an elastic demand
Elasticity and TR along the LINEAR Demand Curve
A linear demand curve that has a constant slope has different elasticities along the curve. Slope is the ratio of changes in two variables (constant). Elasticity is the ratio of % changes in two variable (not constant). Top of linear graph will always be ELASTIC.
Income Elasticity of Demand
A measure of buyers' responses to changes in income.
Elasticity
A measure of how much buyers and sellers respond to changes in market conditions. It allows us to analyze supply and demand with greater precision.
Total Revenue
Amount paid by buyers and sellers of a group.
Coefficients of Price Elasticity of Demand
Ed > 1 elastic demand Ed = 1 unitary elastic demand Ed < 1 inelastic demand Ed = 0 perfectly inelastic demand Ed = ∞ perfectly elastic demand
Coefficients of Cross Elasticity of Demand
Exy > 0 products are substitutes Exy = 0 products are unrelated Exy < 0 products are complements
Coefficients of Income Elasticity of Demand
Ey > 1 normal luxury good 0 < Ey < 1 normal necessity good Ey < 0 inferior good
Necessities vs Luxuries
Necessities tend to have inelastic demand. Luxuries tend to have elastic demand.
Time Horizon
Goods tend to have more elastic demand over longer periods of time.
Substitutes
If a product has a large number of substitutes in production, its supply is likely to be elastic. If the price decreases, producers should shift resources into the production of any other substitutes.
Time available to producers for responding to a change in price
If the time period is short, an increase in price does not significantly affect the quantity offered for sale. Goods tend to have more elastic supply over longer periods of time.
Total Revenue Test
Inelastic demand: Price and TR direct relationship Elastic demand: Price and TR inverse relationship
Price Elasticity of Demand
Measures how much quantity demanded responds to a change in price.
Price Elasticity (of any good)
Measures how willing consumers are to move away from the good as its price rises
Unitary Elastic
Price changes but TR remains constant
Inelastic Demand
Quantity demanded responds only slightly to changes in price
Elastic Demand
Quantity demanded responds substantially to changes in price
Elasticity of Supply
The degree to which quantity offered for sale responds to changes in price
Storage cost
The elasticity of supply for non-perishable goods with low storage costs tends to be greater than the elasticity of supply for perishable goods with high storage costs.
Proportion of Price Relative to Income
The larger the expenditure relative to one's budget, the more elastic the demand because buyers notice the change in price more.
Welfare Economics
The study of how the allocation of resources affect economic wellbeing.
Production complements (joint products)
The supply of a relatively minor joint product is likely to be inelastic (ex. feather vs chicken)
Total Revenue and Price Elasticity of Demand
To increase TR, elastic demand has to increase.
Cross Elasticity of Demand
Two goods: x and y. Exy = [% ∆ quantity demanded of x] / [% ∆ price of y]
Price Elasticity of Demand Formula
[% ∆ quantity demanded] / [% ∆ price]
Coefficients of Price Elasticity of Supply
[% ∆ quantity supplied] / [% ∆ price]
Factors that Determine Price Elasticity of Demand
a) Availability of close substitutes b) Necessities vs Luxuries c) Time horizon d) Proportion of price relative to income
Factors that Determine Price Elasticity of Supply
a) Time available to producers for responding to a change in price b) Storage cost c) Substitutes d) Production complements (joint products)