Microeconomics - Chapter 4 - Elasticity

Short Run

Period of time too short to change plat capacity but long enough to use the fixed sized plant more or less intensively

Complementary Goods

When cross elasticity is negative, we know that X and Y 'go together', an increase in the price of one decreases the demand for the other.

Perfectly Inelastic

Extreme situation where a price change results in no change watsoever in the quantity demanded

Price Elasticity of DEMAND - Identify and interpret the (4) DETERMINANTS

1) The Number and closeness of substitutes 2) The proportion of the consumer's budget committed to the good. 3) The perception of the necessity or luxury. 4) The time frame consumers have to adjust to price changes.

Unitary Response

A given price change an equal change in the quantity. Note: The only way to get one as a quotient is to divide the numerator (quantity) by an equal denominator (price).

Inelastic Response

A relatively large price change causes a relatively small quantity change. Note - The only way to get a number less than one is for the denominator (price) to be larger than the numerator (quantity).

Elastic Reponse

A relatively small price change causes a relatively large quantity change. Note - The only way to get a number greater than one is for the denominator (price) to be smaller than the numerator (quantity).

Perfectly Elastic

Extreme situation where a small price reduction causes buyers to increase their purchases from zero to all they can obtain, the elasticity coefficient is infinite

Cross-Price Elasticity of Demand

Cross elasticity of demand refers to the effect of a change in a product's price on the quantity demanded for another product.

The Formula Method and The Midpoint Formula

Divide by the average ratgher the original value....WHY...? This way we calculate the same percentage change no matter which way the price moves....

The Formula Method

Ed = % Change in Quantity Demanded --------------------------------------------------------- % Change in Price

DEMAND IS (relatively) ELASTIC WHEN...

Ed greater than 1 Qd changes by a larger % than does price If price increases TR decreases If price decreases TR increases

UNIT ELASTICITY

Ed is exactly 1 Qd changes by same % than does price If price increases TR unchanged If price decreases TR unchanged

DEMAND IS (relatively) INELASTIC WHEN...

Ed is less than 1 Qd changes by a smaller % than does price If price increases TR increases If price decreases TR decreases

PRICE ELASTICITY OF SUPPLY

Ed= % change in Q supplied of product X/ % change in P supplied of product X

MIDPOINT FORMULA

Ed=Change in Q/(sum of Q/2) / Change in Price/(Sum of prices/2)

Price Elasticity of Demand Coefficients

Ed>, Ed< 1 and Ed = 1

Cross Elasticity of Demand Coefficient

Ex> 1 , Ex< 1, and Ex = 1 Exy = (percentage change in quantity of X) / (percentage change in price of Y) 1. If cross elasticity is positive, then X and Y are substitutes. 2. If cross elasticity is negative, then X and Y are complements. 3. Note: if cross elasticity is zero, then X and Y are unrelated, independent products.

Income Elasticity of Demand Coefficient Ey> 1, Ey< 1, and Ey = 1

Ey> 1, Ey< 1, and Ey = 1 Ei = (percentage change in quantity demanded) / (percentage change in income) 1. A positive income elasticity indicates a normal or superior good. 2. A negative income elasticity indicates an inferior good. 3. Those industries that are income elastic will expand at a higher rate as the economy grows.

Price Elasticity of Demand

Formula/Mathmatical Symbol: Elasticity = the percentage change in quantity demanded divided by the percentage change in price. E = % ∆in Qd / % ∆in P

Ey> 1, Ey< 1, and Ey = 1

Graph

Substitue Goods

If cross elasticity demand is positive, meaning that sales of X move in the same direction as a change in the price of Y, the X and Y are substitute goods.

The Three Relationships of the Total Revenue Test

If price and total revenue move in the same direction, demand is RELATIVELY INELASTIC. If price and total revenue move in the opposite direction, demand is RELATIVELY ELASTIC. If total revenue does not change when a price change occurs, demand is UNITARY.

Price Elasticity of Supply

Income elasticity of demand refers to the percentage change in quantity demanded that results from some percentage change in consumer incomes.

Coeffcicient of Elasticity - (COE)

It is the ratio of the percentage change in quantity demanded to the percentage change in price.

MidPoint Formula - How to calculate the coefficient of price elasticity of demand coefficients.

MIDPOINT FORMULA Q1 - Q0 (Q1+Q0)/2 ____________ P1-P0 (P1+P0)/2 ** The midpoint formula differs from the FORMULA METHOD; divinding by the avg rather then original value **

Price Elasticity of Supply

Measure of responsiveness of a producer's (seller's) quantity supplied to a change in the price of the good.

CROSS ELASTICITY OF DEMAND

Measure ow sensitive consumer purchases of one product (X) are to change in the price of some other product (Y) Exy=% change in Qd of product X / % change in P of product Y

Total Test Revenue Test to Determine the Price Elasticity of Demand

Measures the change in total revenue that occurs from a change in the price per unit. The defree of price elasticity changes over the range of the demand curve.

Price Elasticity

Measures the responsiveness or sensitivity of consumers to a price change.

Time Frame Consumers have to Adjust to a Price Change

The longer the time over which consumers have to adjust to price changes, the more elastic will be the response to that price change. Example: Given a price change for beer, liquor might not be a close substitute for beer in the short-run. In the long-run one could acquire a taste for liquor

Number and Closeness of Substitutes.

The more "close" substitutes available, the more elastic consumers' responses will be to a price change. Example: Miller beer would be a close substitute for Coors. However, beer is not necessarily a close substitute for wine.

Proportion of the Consumer's Budget Committed to the Good.

The more income is committed to the good, the more elastic will be the consumer's response to a price change. Example: If your mortgage on a new house was to increase substantially, you would respond more to that price change than if the price of a loaf of bread increased substantially.

Perception of Luxury or Necessity

The more we perceive the good to be a luxury, the more elastic our response to to price change. Example: You would probably respond less to an increase in the price of gasoline, and respond more to change in the price steak or fresh sea food. Gasoline is a necessity if we drive.

Price Elasticity of Demand

The responsiveness or sensitivity of consumers to a price change

Price Elasticicity of Supply - Determinants

There is only one determinant of price elasticity of supply... The Time the producer has to adjust to price changes. The more time available to adjust to price changes, the more elastic the supply.

Long Run

Time period long enough for firms to adjust their plant sizes and for new firms to enter (or existing ones to leave) the industry

TOTAL REVENUE (TR)

Total amount the seller receives from the sale of a product in a particular time period TR= P x Q

Market Period

the period that occurs when the time immediately after a change in market price is too short for producers to respond with a change in quantity supplied

Independent Goods

the price of one good does not affect the demand of the other (butter/golf balls)