Micro Chapter 6

Unit elastic demand

A segment of a demand curve is unit elastic demand (ED = 1) if the percentage change in quantity demanded equals the percentage change in the price.

Ceteris Paribus

"Holding other things constant" Quantity demanded changes inversely with changes in price.

Price Elasticity of Demand

A measure of the relationship between a change in the quantity demanded of a particular good and a change in its price. Measures how responsive quantity demanded is to a price change Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price.

Income elasticity of demand

A measure of the relationship between a relative change in income and the consequent relative change in demand (not quantity demanded)

Normal good

Goods for which demand increases when income increases, and falls when income decreases but price remains constant, i.e. with a positive income elasticity of demand.

Inferior goods

Goods whose quantity demanded decreases when consumer income rises (or quantity demanded rises when consumer income decreases)

Elastic

If a percentage change in price leads to a larger percentage change in the quantity demanded (ratio is greater than 1) Goods with close substitutes tend to have more elastic demand

Inelastic

If a percentage change in price leads to a smaller percentage change in the quantity demanded (ratio is less than 1) Goods with little to no close substitutes tend to be less elastic (demand for food is typically inelastic because it is more of a necessity and has less close substitutions)

Complement goods

If cross-price elasticity of demand between two goods is negative, they are complements because the price of one good and the demand for the other move in opposite directions

Substitute goods

If the cross-price elasticity of demand between two goods is positive, they are substitutes because the price of one good and the demand for another move in the same direction.

Price elasticity of supply

Measures how responsive the quantity sellers are willing to sell is to changes in the price Price elasticity of supply = %change in quantity supplied / %change in price Goods with supply elasticity that is greater than 1 are relatively elastic in supply, and when supply elasticity is less than 1, supply is relatively inelastic

Cross-price Elasticity

Measures the responsiveness of the quantity demanded for a good to a change in the price of another good Measures both the direction and magnitude of the impact that a price change for one good will have on the quantity of another good demanded at a given price cross price elasticity of demand = %change in quantity demanded of one good at a given price / %change in price of another good

Superior good

Superior goods make up a larger proportion of consumption as income rises, and therefore are a type of normal goods in consumer theory. Such a good must possess two economic characteristics: it must be scarce, and, along with that, it must have a high price.

Long run vs. short run

Time is usually critical in supply elasticities because it is more costly for producers to bring forth and release resources in shorter periods of time **Hence, supply tends to be more elastic in the long run than in the short run