Microeconomics 102 - CH 4. Elasticity
income elasticity of demand goods
(-) Inferior good (+) normal good (substitutes)
Determinants of Price Elasticity of Demand
1. Substitution options (More options, more elastic) 2. budget share (Large share, more elastic) 3.time (Long time to adjust, more elastic)
2 rules of elasticity of demand
1. When price elasticity of demand is greater than 1, changes in price and changes in total expenditure always move in opposite directions. 2. When price elasticity of demand is less than 1, changes in price and changes in total expenditure always move on the same direction.
equation for finding price elasticity of demand when asked for the price of elasticity of demand for a point of a slope on a graph
E= P(price)/Q(quantity) x 1/slope
total expenditure = total revenue
The dollar amount consumers spend on a product (P x Q) is equal to the dollar amount that sellers receive.
to find income elasticity of demand
multiply the income elasticity of demand by the percentage. it will be either a positive or negative based on if it is an inferior or normal good.
income elasticity of demand
the percentage by which a good's quantity demanded changes in response to a 1 percent change in income
cross-price elasticity of demand
the percentage by which the quantity demanded of the first good changes in response to a 1 percent change in the price of the second
Remember:
When an item has many substitutes, to the price elasticity of demand is relatively high. EXAMPLE: green peas
If the cross-price elasticity of demand for ice cream with respect to the price of apple pie is negative, then the two goods are
complements
If there's an increase in the supply of bottled water (a rightward shift), then total revenue from the sale of bottled water will
decrease if the price elasticity of demand for bottled water is less than one.
If the supply of nail polish shifts to the left, then total expenditure on nail polish will
decrease if the price elasticity of demand for nail polish is greater than one
as prices increase, expenditure _________.
decreases
If the price in elasticity goes up the quantity demanded goes _______.
down
Determinants of Supply Elasticity
flexibility of inputs, mobility of inputs, ability to produce substitute inputs, time
when a good has many close substitutes, the price elasticity of demand tends ti be relatively
high
perfectly elastic demand curve
if price elasticity of demand is infinite (horizontal line)
perfectly inelastic demand curve
if price elasticity of demand is zero (vertical line)
price elasticity of demand EXAMPLE
if the price of beef falls by 1 percent and the quantity demanded rises by 2 percent, then the price elasticity of demand for beef has a value of -2
If the cross-price elasticity of demand for motorcycles with respect to the price of cars is 0.05, then if the price of cars increases by 10 percent, then, the quantity of motorcycles will
increase by 0.5 percent
If an early frost damages this year's orange crop, causing the supply curve for oranges to shift to the left, then total revenue from the sale of oranges will
increase if the demand for oranges is inelastic with respect to price
an increase in the supply of dog food will lead the total expenditure on dog food to
increase if the price elasticity of demand for dog food is greater than one
To find total expenditure
multiply the price by quantity of good then multiply that total by the larger quantity.
unit elastic
price elasticity of demand equals 1
elastic
price elasticity of demand is greater than 1
inelastic
price elasticity of demand is less than 1
price elasticity of demand
the percentage change in quantity demanded of a good or service that results from a 1 percent change in price
price elasticity of supply
the percentage change in quantity supplied that occurs in response to a 1 percent change in price
Remember:
the price elasticity of demand will always be negative, but we ignore the negative.
If the price in elasticity goes down the quantity demanded goes _______.
up
