Chapter 6 - Elasticity: The Responsiveness of Demand and Supply
In general, what are elastic goods?
goods that are considered luxury goods
In general, what goods are considered inelastic?
goods that are considered necessities
fraction of budget-elasticity
if is a large part of their budget, it is elastic
the total revenue parabola along price elasticity along a demand curve-what increases total revenue
increase in quantity from a decrease in price
total revenue parabola along price elasticity along a demand curve-what decrease total revenue
increase in quantity from a decrease in price decreases total revenue
Price elasticity along along a demand curve
left part is elastic, middle is unit elastic, and right is inelastic
in elastic demands-what is the relationships between price and quantity
percentage change in quantity will exceed the percentage change in price
Perfect elastic demand
pice elasticity of demand is infinite
is price elasticity of demand positive or negative
positive
Unit elastic demand
price elasticity of demand is one, so the percentage change in quantity equals the percentage change in price
Perfectly inelastic demand
price elasticity of demand is zero
total revenue formula
price per unit * quantity sold
inelastic demand (revenue define)
relationship between price and total revenue is positive. Increase in price increases total revenue. Decrease in price decreases total revenue.
inelastic demand-if price goes down, then what happens to revenue
revenue goes down because the percentage change in quantity is smaller than the percentage change in price
elastic demand-if price decreases, then what happens to revenue
revenue goes up because the percentage change in quantity is larger than the percentage in price
inelastic demand-if price goes up, what happens to revenue
revenue increases because the percentage change in quantity is smaller than the percentage change in price
fraction of budget-inelastic
small fraction, then it is inelastic
Be careful with the elasticity with brands
specific brands of coffee might be elastic but the whole entire coffee market may be inelastic
Say a city increases the price it charges for water, the total revenue goes up, what does that tell us
that the demand is inelastic
define total revenue
the money a firm generates from selling its product
Suppose that a music store increases the price of its CDs, and its total revenue drops-what does that tell us
the negative relationship between price and total revenue means that the demand for the store's CD is elastic
elastic demand (revenue define)
the relationship between price and total revenue is negative: An increase in price decreases total revenue; a decrease in price increases total revenue
define price elasticity of demand
the responsiveness of the quantity demanded to a change in price
elastic demand-if price increases, what happens to revenue
total revenue decreases because the percentage change in quantity is larger than the percentage change in price
unit elastic demand-revenue define
total revenue does not vary with price
what the total revenue looks like along price elasticity along a linear demand curve
upside down parabola
passage of time and elasticity
usually, the longer time passes the more elastic the demand
Point elasticity formula
Delta Q/Delta P * P/Q
The relationship between elasticity and revenue
Firms are interested of the effects of price changes on their revenue. The more elastic the demand, the larger the reduction in quantity sold-the worse it is because you are selling less than before
Substitute and elasticity
When there are a wide range of substitutes of goods (like cereal), the demand is elastic. (Ex-cornflakes, if price rices for cornflakes, consumers will choose other substitutes. So the demand is elastic)
Substitutes and inelasticity
When there aren't a wide range of substitutes for goods like insulin, the demand is inelastic (Insulin-since there not too many substitutes for it, an increase in price wouldn't affect consumer behavior too much)
passage of time and inelasticity
as short time passes, the less inelastic the demand
the slope-what does it mean in the price elasticity along a demand curve
equal to the change of quantity by 1 by the price (For ex- a slope of -$2 means a $2 decrease in price increases the quantity demanded by one unit
are specific brands elastic or inelastic?
elastic because loyal customers are very responsive to changes in price of that brand
along the linear demand curve-where is revenue maximized
middle point
necessity vs. luxury good
necessity means inelastic and luxury good is elastic
the relationship between the law of demand and law of supply is
opposite
percentage change in quantity demanded
percentage change in price * Elasticity of demand
in inelastic demand-relationship between price and quantity
percentage change in quantity will be smaller than the percentage change in price
The law of demand tells us that the price and quantity demanded move in opposite direction, therefore that means percentage change in quantity
will always have an opposite sign of the percentage change in price