Elasticity Khan Academy

perfect elastic

The opposite extreme occurs when even a tiny rise in the price will cause the quantity demanded to drop to zero or when even a tiny fall in the price will cause the quantity demanded to get extremely large So a horizontal demand curve implies an infinite price elasticity of demand. When the price elasticity of demand is infinite, economists say that demand is perfectly elastic.

Income Elacticity

% change in quantity demanded/ % change in income If your income goes up than your quantity demanded also goes up which is a situation for normal good If you have a percent increase in income that does not lead you to have an increase in percent change in quantity demanded, it can lead to a percent decrease in a quantity demanded, so you would have a negative percent change

income shares

-If bubblegum right now is 25 cents and it went to 50 cents -that could reduce the quantity demanded but it may not be as significant -Lower share of income the less elastic the market is -If people are already spending 20% to 30% of their income on the automobile and the automobile were to double, their income could not support that, so they will be highly sensitive to changes in price (more elastic)

substitution effect

-When price of a good decreases, it becomes cheaper relative to other goods, so consumers will purchase more of it and less of other goods the change in the quantity of a good demanded as the consumer substitutes the good that has become relatively cheaper for the good that has become relatively more expensive When a good absorbs only a small share of the typical consumer's income, as with pillowcases and kites, the substitution effect is essentially the sole explanation of why the market demand curve slopes downward

1% change in price

-if the price elasticity of demand is equal to three, it means that for every 1% increase in price, there is a 3% decrease in quantity demanded since 3%/1% = 3

Perfectly elastic

-it is almost horizonal -this is when a price change affects the demand by a lot Example: Vending Machine: Price/Quantity .99/200 1/100 1.01/200

price elasticity of demand

-the price elasticity of demand compares the percent change in quantity demanded to the percent in price as we move along the demand curve

Inelastic is less than 1

-this means that a 1% drop in price means we get less than 1 percent increase in quantity Total revenue will go down

Elasticity is greater than 1

-this means that a 1% drop in price you have a greater than 1 percent increase in quantity

Income effect

-when the price of a good decreases, a consumers purchasing power also increases the change in the quantity of a good demanded that results from a change in the consumer's purchasing power when the price of the good changes

Unit elastic percent

1 percent drop in price will result in exactly 1 percent increase in quantity demanded

Determents of Price Elasticity of Demand

1. Substitutes 2. Time Frame 3. Income Share 4. Luxury vs. Necessity 5. Narrowness of market

Except in the rare case of a good with perfectly elastic or perfectly inelastic demand, when a seller raises the price of a good, two countervailing effects are present:

A price effect. After a price increase, each unit sold sells at a higher price, which tends to raise revenue. A quantity effect. After a price increase, fewer units are sold, which tends to lower revenue.

cross-price elasticity of demand between buns and hot dogs

However, if someone says that the cross-price elasticity of demand between buns and hot dogs is −0.3, you'll know that a 1% increase in the price of buns causes a 0.3% decrease in the quantity of hot dogs demanded,

Elastic

If demand for a good is elastic (the price elasticity of demand is greater than 1), an increase in price reduces total revenue. In this case, the quantity effect is stronger than the price effect.

Inelastic (total revenue)

If demand for a good is inelastic (the price elasticity of demand is less than 1), a higher price increases total revenue. In this case, the price effect is stronger than the quantity effect.

Unit elastic (total revenue)

If demand for a good is unit-elastic (the price elasticity of demand is 1), an increase in price does not change total revenue. In this case, the quantity effect and the price effect exactly offset each other.

Luxury vs. necessity

Luxury=elastic Necessity=inelastic if you are diabetic and you need insulin and if they raised the price you would still buy because you need it to live, and you will be less sensitive Luxury If you buy a gold tiara but it goes very up, you will be more elastic

Substitutes

Many substitutes means more elasticity, people would be very sensitive to price If you have few substitutes, then even if the price goes really up, people will not know what to substitute with and may still buy a reasonably similar quantity, so it is less elastic

Unit elasticity (revenue)

Price decreases, total revenue stays constant Price increases, total revenue

Inelastic (revenue)

Price decreasing, lower revenue price increasing, higher revenue

total revenue

Price x Quantity

Timeframe

Short time frame- less elastic (if you need to catch a flight tomorrow you don't have time to be elastic) Longer time frame, people will be more sensitive since they can find more substitutes

perfect inelastic

Since the percent change in the quantity demanded is zero for any change in the price, the price elasticity of demand in this case is zero. The case of a zero price elasticity of demand is known as perfectly inelastic demand.

cross-price elasticity of demand

Specifically, we can best measure how the demand for a good is affected by prices of other goods using a measure called the cross-price elasticity of demand

substitutes and complements

The demand for a good is often affected by the prices of other, related goods—goods that are substitutes or complements If the cross price elasticity is negative is it a complement If its is positive is a substitute As with substitutes, the size of the cross-price elasticity of demand between two complements tells us how strongly complementary they are: if the cross-price elasticity is only slightly below zero, they are weak complements; if it is a large negative number, they are strong complements.

income elasticity of demand

The income elasticity of demand measures how changes in income affect the demand for a good. It indicates whether a good is normal or inferior and specifies how responsive demand for the good is to changes in income When the income elasticity of demand is positive, the good is a normal good. When the income elasticity of demand is negative, the good is an inferior good. The demand for a good is income-elastic if the income elasticity of demand for that good is greater than 1. When income rises, the demand for income-elastic goods rises faster than income The demand for a good is income-inelastic if the income elasticity of demand for that good is positive but less than 1. When income rises, the demand for income-inelastic goods rises as well, but more slowly than income.

absolute

The midpoint formula for calculating responsiveness is absolute (without negative sign)

elastic revenue

While it is elastic lower price, increase in revenue higher price, decrease in revenue

total revenue

Why does it matter whether demand is unit-elastic, inelastic, or elastic? Because this classification indicates how changes in the price of a good will affect the total revenue earned by producers from the sale of that good. the total value of sales of a good or service; equal to the price multiplied by the quantity sold.

Very inelastic

given a percent change P, you have a small percent change in Q

very elastic

given change in price you have a large change in demand (large percentage change) -Given percent change in P, you have a large percent change in Q

elasticity

measures the percentage change in quantity demanded in response to a percentage change in price

Perfectly inelastic

this is when the quantity does not change it is a vertical line and the demand elasticity is 0 dollars

income elasticity of demand

we can best measure how demand is affected by changes in income using the income elasticity of demand.