total revenue

time

-The amount of time it takes producers to shift resources between alternative uses to alter production of a good can determine the degree of price elasticity of supply. -The easier and more rapid the transfer of resources, the greater is the price elasticity of supply. -The longer a firm has to adjust to a price change, the greater the elasticity of supply.

linear demand curve

Along a linear demand curve, elasticity varies over the different price ranges

total revenue test: elastic

If demand is elastic, a decrease in price will increase total revenue, and an increase in price will reduce total revenue

long run

In the long run, producers are able to change all the resources they employ. This time period is long enough for firms to adjust their plant sizes and for new firms to enter (or existing firms to exit) the industry. The supply of a product is more elastic than in the short run.

short run

In the short run, producers are able to change the quantities of some but not all the resources they employ. This time period is too short to change plant capacity but long enough to use fixed plant more or less intensively. The supply of a product is more elastic than the market period.

market period

a period in which producers of a product are unable to change the quantity produced in response to a change in price. During this time period, the supply of a product is fixed, or supply is perfectly inelastic.

Price elasticity of supply

measures the responsiveness of sellers to changes in the price of a product. If producers are relatively responsive, supply is elastic. If producers are relatively insensitive to price changes, supply is inelastic.

Price elasticity of demand is greater:

the larger the number of substitute goods that are available the higher the price of a product relative to one's income the more that a good is considered to be a "luxury" rather than a "necessity" the longer the time period under consideration

Income elasticity of demand measures

the responsiveness of consumer purchases to changes in consumer income.

Normal Goods

will have an income elasticity of demand that is positive. More of them are demanded as income increases. Ei > 0

total revenue: inelastic

If demand is inelastic, a price decrease will decrease total revenue, while an increase in price will increase total revenue.

total revenue: unit elastic

If demand is unit elastic, total revenue remains constant when prices rise or fall.

Determinants of Price Elasticity of Demand

Substitutability Proportion of Income Luxuries versus Necessities Time

Inferior goods

have a negative income elasticity of demand. As income rises, the demand for them falls. Ei < 0