ME- Elasticity
The elasticity of supply
- Price elasticity of supply is a measure of how much the quantity supplied of a good responds to a change in the price of that good. Price elasticity of supply is the percentage change in quantity supplied divided by the percent change in price. - Note: The elasticity of supply will always be positive as price and quantity supplied always move in the same direction.
Determinants of demand of elasticity
Demand tends to be more elastic: o the larger the number of close substitutes o if the good is a luxury o the more narrowly defined the market o the longer the time period
The midpoint method
The midpoint formula is preferable when calculating the price elasticity of demand because it gives the same answer regardless of the direction of the change.
Determents of elastic of supply
o Ability of sellers to change the amount of the good they produce. (Availability of resources) o Beach-front land is inelastic. o Books, cars, or manufactured goods are elastic. o Time period. o Supply is more elastic in the long run.
Unit Elastic
o Quantity demanded changes by the same percentage as the price.
Perfectly elastic
o Quantity demanded changes infinitely with any change in price.
Inelastic Demand
o Quantity demanded does not respond strongly to price changes. o Price elasticity of demand is less than one.
Perfectly Inelastic
o Quantity demanded does not respond to price changes
Elastic Demand
o Quantity demanded responds strongly to changes in price. o Price elasticity of demand is greater than one.
Cross price elasticity of demand
o The percentage change in the quantity demanded of one good divided by the percentage change in the price of another good.
Total revenue and the price elasticity of demand
o Total revenue is the amount paid by buyers and received by sellers of a good. o Calculated as the price of the good times the quantity sold. o TR = P x Q
Income elasticity
o Types of goods o Normal goods o Inferior goods o Higher income raises the quantity demanded for normal goods but lowers the quantity demanded for inferior goods. o Goods consumers regard as necessities tend to be income inelastic. o Examples include food, fuel, clothing, utilities and medical services. o Goods consumers regard as luxuries tend to be income elastic. o Examples include sports cars, furs, and expensive foods.
Elasticsity and Total revenue along a linear demand curve
o With an inelastic demand curve, an increase in price leads to a decrease in quantity that is proportionately smaller. Thus, total revenue increases. o With an elastic demand curve, an increase in the price leads to a decrease in quantity demanded that is proportionately larger. Thus, total revenue decreases.
