Microeconomics: Chapter 5

Price Elasticity of Supply

A measure of the responsiveness of the quantity of a good supplied to the price of that good. It is the ratio of percent change in the quantity supplied to the percent change in the price as we move along the supply curve. Ratio of percent change in quantity of lettuce supplied to the percent change in price of lettuce

Elastic

Demand is elastic if the price elasticity of demand is greater than 1 The demand for bicycles is elastic because the price elasticity of demand is greater than 1.

Inelastic

Demand is inelastic if the price elasticity of demand is less than 1 The demand for milk is inelastic because the price elasticity of demand is less than 1.

Unit-Elastic

Demand is unit-elastic if the price elasticity of demand is exactly 1 The demand for branded clothing is unit-elastic because the price elasticity of demand is exactly 1.

Income-Elastic

If the good elasticity of demand for that good is greater than 1 When the income elasticity of lettuce is greater than 1, it is elastic

Income-Inelastic

If the income elasticity of demand for that good is positive but less than 1. When the income elasticity of lettuce is lesser than 1, it is inelastic

Cross-Price Elasticity of Demand

Measures the effect of the change in one good's price on the quantity demanded of the other good. It is equal to the percent change in the quantity demanded of one good divided by the percent change in the other good's price. The cross-price elasticity of demand will help measure the effect of change in the price of lettuce on the quantity demanded of tomato.

Income elasticity of demand

Percent change in the quantity of a good demanded when a consumer's income changes divided by the percent change in the consumer's income. How much will the quantity of lettuce demanded change when the consumer's income changes

Midpoint Method

Technique for calculating the percent change. Calculate the changes in a variable compared with the average, or midpoint, of the starting and final values The midpoint method helps calculate the percent change in quantity of lettuce demanded compared to the average quantity demanded of lettuce .

Price elasticity of Demand

The ratio of the percent change in the quantity demanded to the percent change in the price as we move along the demand curve Ratio of percent change in quantity of lettuce demanded to the percent change in price of lettuce

Total Revenue

Total value of sales of a good or service. It is equal to the price multiplied by the quantity sold The total revenue collected from the sale of lettuce is the quantity of lettuce sold multiplied by the price.

Perfectly Elastic

When any price increase will cause the quantity demanded to drop to zero. When demand is perfectly elastic, the demand curve is a horizontal line. Foreign Currency is perfectly elastic and any increase in price will cause the quantity demanded to drop to zero.

Perfectly Elastic Supply

When even a tiny increase or reduction in the price will lead to very large changes in the quantity supplied, so that the price elasticity of supply is infinite. A perfectly elastic supply curve is a horizontal line. Branded items like Porsche cars are an example of perfectly elastic supply

Perfectly Inelastic Supply

When the price elasticity of supply is zero, so that changes in the price of the good have no effect on the quantity supplied. A perfectly inelastic supply curve is a vertical line. Land is an example of perfectly inelastic supply

Perfectly Inelastic

When the quantity demanded does not respond at all to changes in the price. When demand is perfectly inelastic, the demand curve is a vertical line. The quantity demanded for insulin is perfectly inelastic and it does not respond at all to changes in price.