Chapter 6- Elasticity: The Responsiveness of Demand and Supply

If the income elasticity is negative, then the good is _____.

Inferior (Ex: High-fat meat).

Inferior

Inverse

Total Revenue When Demand is Elastic

Inverse

Price Elastic

Larger than 1

Middle of Slope

Unit Elastic

Demand is unit elastic when the percentage change in quantity demanded is equal to the percentage change in price, so the price elasticity is equal to 1 in absolute value.

Unit-Elastic Demand

Zero CPE

Unrelated

If the products are _____ , then the cross-price elasticity of demand will be zero.

Unrelated (Ex: Tablets and peanut butter).

Why do we use the MP formula?

We want consistency regarding one price change.

Unrelated

Zero CPE

Midpoint Formula

(Q2-Q1) (P2-P1) ------------ / --------------- (Q1+Q2) (P1+P2) ----- ----- 2 2

Determinants of Price Elasticity of Demand

-Availability of close substitute goods. -The passage of time. -Whether the good is a luxury or a necessity. -The definition of the market. -The share of the good in the consumer's budget.

How a firm finds the Price Elasticity of Demand:

-For a well established product, use historical data to estimate the demand curve. -For a new product, rely on market experiments.

Why do we not always use slope?

Problem is that it is sensitive to different units of measurement.

Cross-Price Elasticity

By how much a change in price for substitutes or compliments will affect my good.

If demand is ____ , then the absolute value of price elasticity is less than 1.

Inelastic

Negative CPE

Compliments

If the products are _____ , then the cross-price elasticity of demand will be negative.

Compliments (Ex: Tablet computers and applications).

The percentage change in the quantity demanded of one good divided by the percentage change in the price of another good.

Cross-Price Elasticity of Demand

Determinants of Price Elasticity of Supply

Depends on the ability and willingness of firms to alter the quantity they produce as price increases.

Availability of Close Substitutes

Direct

Definition of the Market

Direct

Normal

Direct

Passage of Time

Direct

Share of a Good in a Consumer's Budget

Direct

Total Revenue When Demand is Inelastic

Direct

If demand is ____ , then the absolute value of price elasticity is greater than 1.

Elastic

Top left half of Slope

Elastic

Demand is elastic when the percentage change in the quantity demanded is greater than the percentage change in price, so the price elasticity is greater than 1 in absolute value.

Elastic Demand

Demand is inelastic when the percentage change in quantity demanded is less than the percentage change in price, so the price elasticity is less than 1 in absolute value.

Inelastic Demand

A measure of how much one economic variable responds to changes in another economic variable.

Elasticity

Slanted Slope

Elasticity is different at every point.

Perfectly Elastic

Elasticity is infinite; quantity demanded is infinitely responsive to price changes.

Perfectly Inelastic

Elasticity is zero; quantity demanded doesn't change as price changes.

Unit Price Elastic

Equal to -1

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.

Income Elasticity

Bottom right half of Slope

Inelastic

Inferior

Negative

Complements

Negative CPE

What if the income elasticity is zero?

Neutral good; neutral to changes in income

Positive (<1) Positve (>1) Inferior

Normal and Necessity Normal and Luxury Inferior

If the income elasticity is positive and greater than 1, then the good is _____.

Normal and a luxury (Ex: Caviar).

If the income elasticity is positive but less than 1, then the good is _____.

Normal and a necessity (Ex: Bread).

Price Elasticity of Demand Equation

Percentage change in quantity demanded ----------------------------------------------------- Percentage change in price

CPE Equation

Percentage change in the demand of one good -------------------------------------------------------- Percentage change in the price of another good

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

Perfectly Elastic Demand

The case where the quantity demanded is completely unresponsive to price and the price elasticity of demand equals zero.

Perfectly Inelastic Demand

If demand is ____ , then the absolute value of price elasticity is equal to infinity.

Perfectly elastic

If demand is ____ , then the absolute value of price elasticity is equal to 0.

Perfectly inelastic

Normal and Necessity

Positive (<1)

Normal and Luxury

Positive (>1)

Substitutes

Positive CPE

The responsiveness of the quantity demanded to a change in price, measured by dividing the percentage change in the quantity demanded of a product by the percentage change in the product's price.

Price Elasticity of Demand

Cutting Price when demand is Inelastic=

Revenue goes down

Cutting price when demand is Elastic=

Revenue goes up

Price Inelastic

Smaller than 1

Positive CPE

Substitutes

If the products are _____ , then the cross-price elasticity of demand will be positive.

Substitutes (Ex: Two brands of tablet computers).

Luxuries versus Necessities

The demand curve for a luxury is more elastic than the demand curve for a necessity.

The total amount of funds a seller receives from selling a good or service, calculated by multiplying price per unit by the number of units sold.

Total Revenue

If demand is ____ , then the absolute value of price elasticity is equal to 1.

Unit Elastic

Price Elasticity of Demand will ____ in value, the more the quantity _____.

decrease, increases

If supply is inelastic, quantity supplied cannot change much in response to the demand change, so price will ________.

rise a lot

If supply is elastic, price will ________.

rise much less