Microeconomics Chapter 6 Elasticity: The Responsiveness of Demand and Supply

The passage of time

Over time, people can adjust their buying habits more easily. Elasticity is higher in the long run than the short run. Example, if the price of gasoline rises ,it takes a while for people to adjust their gasoline consumption.

elasticity

a measure of a variable's sensitivity to a change in another variable

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. It measures the strength of substitute or complement relationships between goods.

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 a product by the percentage change in the products price.

price elasticity of demand

% change in quantity demanded / % change in price

price elasticity of supply

% change in quantity supplied / % change in price

midpoint formula for percentage change

(A-B)/((A+B)/2)

i,ii, and iv

An elasticity is: i. a measure of the sensitivity of a variable to a change in another variable ii. invariant (or insensitive) to the units in which variables are measured iii. defined as the ratio of the percentage change in the affecting variable to the percentage change in the affected variable iv. defined as the ratio of the percentage change in the affected variable to the percentage change in the affecting variable

iv

Consider the market for a normal good. If the market price rises from $30 to $40 and as a result the per-period quantity demanded decreases from 20 to 10 units, then it may be concluded that over this price range: i. demand has decreased ii. demand is unit elastic iii. demand is inelastic iv. demand is elastic

elastic

Demand is ______ if its price elasticity of demand is larger (in absolute value) than 1.

inelastic

Demand is ______ if its price elasticity of demand is smaller (in absolute value) than 1.

unit-elastic

Demand is _________ if the price elasticity of demand is exactly equal to (negative) 1

elastic

Flatter demand curves are more ______

The share of a good in a consumer's budget

If a good is a small portion of your budget, you will likely not be very sensitive to its price. Example, you might buy table salt once a year or less; changes in its price will not affect very much how much you buy.

The availability of close substitutes

If a product has more substitutes available, it will have more elastic demand. For example, if there are few substitutes for gasoline, its price elasticity of demand is low.

ii and iii

If the demand for a good is elastic with respect to its price, then a: i. percentage change in price will result in a smaller percentage change in quantity demanded ii. percentage change in price will result in a greater percentage change in quantity demanded iii. change in price will cause revenues (or consumer expenditures) to change in the opposite direction iv. change in price will cause revenues (or consumer expenditures) to change in the same direction

0.2 percent increase in quantity demanded

If the price elasticity of demand for a good at the current price is ED = -0.2, then a 1 percent decrease in price will result in a:

Income elasticity of demand

Is 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.

Whether the good is a luxury or a necessity

People are more flexible with luxuries than necessities, so price elasticity of demand is higher for luxuries. Example; many people consider milk and bread necessities; they will buy them every week almost regardless of the price.

Effect of cutting price with different elasticities

Suppose demand for your product is relatively price inelastic. Customers are not very sensitive to the price of your product. As you decrease the price, you expect to gain few additional customers. Two scenarios may happen, either the few additional customers do not compensate for the lost revenue, so overall revenue goes down. Or, the many additional customers more than compensate for the lost revenue, so overall revenue goes up.

negative and the goods are complements

Suppose that an 8 percent decrease in the price of good X causes a 6 percent increase in the quantity demanded of good Y. The cross-price elasticity of demand is therefore:

A and C

Suppose that at the current prices the price elasticity of demand is 0.32, 1.96, 0.67, and 2.42 for products A, B, C, and D respectively. A one percent decrease in price will decrease total revenue (TR) in which of the following:

TR = 80Q - 2Q^2

Suppose the market demand for a good is described by the demand function P = 80 - 2Q. It follows that the total revenue function relating the total revenues (TR) to the quantity sold (Q) is:

smaller than the income elasticity of demand for foreign vacation travel

The income elasticity of demand for food (e.g., measured by daily calories consumed) can reasonably be expected to be:

the larger the number of substitutes that exist and the larger the price elasticity of demand

The more narrowly a product is defined (for example, Coca Cola versus soft drinks in general):

The definition of the market

The more narrowly defined the market, the more substitutes are available, and hence the more elastic is demand. Example; you might believe there is no good substitute for jeans, so your demand for jeans is very inelastic. But if you consider different brands of jeans, you might be more sensitive to the price of a particular brand.

the short-run supply curve for housing is less elastic than the long-run supply curve for housing

The supply of housing within a local housing market (e.g., Orange county) takes a considerable amount of time to increase as a result of an increase in the demand for housing. Defining the short-run as a period of time less than six months and the long-run as a period of time greater than six months, it follows that:

total revenue

The total amount of funds received by a seller of a good or service, calculated by multiplying the price per unit by the number of units sold. Knowing the price elasticity of demand for your product can help to answer these questions.

perfectly elastic demand

case where the quantity demanded is infinitely responsive to price and the price elasticity of demand equals infinity

reduce, increase

if demand is elastic, a firm will _____ its total revenues if it raises its price. It will _____ its total revenues if it reduces its price.

increase, decrease

if demand is inelastic, a firm will ______ its total revenues if it raises its price. It will ______ its total revenues if it reduces its price.

perfectly inelastic demand

quantity demanded is completely unresponsive to price and the price elasticity of demand equals zero

price elasticity of demand

responsiveness of the quantity demanded to a change in price

inelastic

steeper demand curves are more _____