Midterm 1 Price Elasticity

Midpoint Method

A way to measure elasticity between two points.

Complements

Cross Price Elasticity = Negative

Substitute

Cross Price Elasticity = Positive

Time Horizon

Goods tend to have more elastic demand over longer time horizons.

Demand Curve Shifts

If demand decreases shift to the left. If demand increases shift to the right.

Line is perfectly inelastic

In the extreme case of a zero elasticity, demand is perfectly inelastic, and the demand curve is vertical. In this case, regardless of the price, the quantity demanded stays the same.

Elasticity of Supply over Time

Supply is usually more elastic in the long run than in the short run.

Price Elasticity of Demand

a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price

income elasticity of demand

measures how the quantity demanded changes as consumer income changes.

Cross Price Elasticity of Demand

measures how the quantity demanded of one good responds to a change in the price of another good.

Substitute Elasticity

Goods with close substitutes tend to have more elastic demand because it is easier for consumers to switch from that good to others.

Price Elasticity of Demand relative to Total Revenue

If elastic then if Price increases TR decreases. If inelastic then if Price increases TR increases as well

Supply Curve Shifts

If production is made cheaper/easier it shifts to the right. If made more expensive/difficult it shifts to the left.

Necessities v. Luxuries

Necessities tend to have inelastic demands, whereas luxuries have elastic demands.

Line is perfectly elastic

This occurs as the price elasticity of demand approaches infinity and the demand curve becomes horizontal, reflecting the fact that very small changes in the price lead to huge changes in the quantity demanded.

price elasticity of supply

price elasticity of supply measures how much the quantity supplied responds to changes in the price.