Chapter 4
|Ed| = 1
unit elastic, % change in Qd = % change in price
Ea,b = 0
unrelated good
A perfectly inelastic demand curve is
vertical
Cross-Price Elasticity of Demand Formula (Good A and Good B)
% change in demand of A/% change in price of B
Income Elasticity of Demand Formula
% change in demand/% change in income
Price Elasticity of Demand Calculation
Ed = % change in Qd/% change in Pd
Cost Relative to Income
- price elasticity of demand determinant - spend a small share of income on a good = less elastic - spend a large share of income on a good = more elastic
Adjustment Time, Supply
- price elasticity of supply determinant - long periods = more elastic - short periods = less elastic
Flexibility of Production Process
- price elasticity of supply determinant - producers produce more of one thing if the price of the product is higher than other products they produce, for example a farmer and his crops
Availability of Inputs
- price of elasticity of supply determinant - more available = less elastic - less available = more elastic
First half of a linear demand curve is
elastic
First half of a total revenue parabola is
elastic
|Ed| >1
elastic, % change in Qd > % change in price
A perfectly elastic demand curve is
horizontal
Elastic: If price decreases and Qd increases, total revenue
increases
Inelastic: If price increases and Qd decreases, total revenue
increases
Second half of a linear demand curve is
inelastic
Second half of a total revenue parabola is
inelastic
|Ed|< 1
inelastic, % change in Qd < % change in price
Ei < 0
inferior good
Mid-Point Method
method that measures percentage change in demand (or supply) relative to a point midway between two points on a curve; used to estimate elasticity
Ei > 0
normal good, 0 to 1 = normal necessity >1 = normal luxury
Ea,b > 0
substitute
Total Revenue
the amount that firm receives from the sale of goods and services; calculated as the quantity sold multiplied by the price paid for each unit
Price Elasticity of Demand
the size of the change in the quantity demanded of a good or service when its price changes
Price Elasticity of Supply
the size of the change in the quantity supplied of a good or service when its price changes
Price Elasticity of Supply Determinants
- adjustment time - flexibility of production process - availability of inputs
What determines price elasticity of demand?
- availability of substitutes - degree of necessity - adjustment time - cost relative to income - scope of the market
How to allocate shortages
- first come, first serve - asses need, then allocate based on assessment - lottery
The price elasticity of demand of a perfectly elastic demand curve is equal to
- infinite
Scope of the Market
- price elasticity of demand determinant - depends on how you define the market - wider = more inelastic - narrower = more elastic
Availability of Substitutes
- price elasticity of demand determinant - if close substitutes are available for a particular good, then the demand for that good will be more elastic than if only distant substitutes are available
Adjustment Time, Demand
- price elasticity of demand determinant - long run = more elastic - short run = more inelastic
Degree of Necessity
- price elasticity of demand determinant - normal goods = more inelastic - luxury goods = more elastic
The price elasticity of demand of a perfectly inelastic demand curve is equal to
0
Cross-Price Elasticity of Demand
a measure of hose the quantity demanded of one good changes when the price of a different good changes
Elasticity
a measure of how much consumers and producers will respond to a change in market conditions
Inelastic: Revenue moves in the direction of
Price
Elastic: Revenue moves in the direction of
Quantity demanded
Income Elasticity of Demand
a measure of how much the quantity demanded changes in response to a change in consumers' incomes
Mid-Point Method Formula for Demand and Supply (replace D with S)
[(Qd2-Qd1)/(Qd2+Qd1/2)]/ [(P2-P1)/(P2+P1/2)]
Marginal Revenue =
change in total revenue/change in quantity
Ea,b < 0
complement
Elastic: If price increases and Qd decreases, total revenue
decreases
Inelastic: If price decreases and Qd increases, total revenue
decreases
Perfectly Elastic Demand
demand for which the demand curve is HORIZONTAL, in a way such that demand could be any quantity at the given price, but drops to zero if the price increases
Perfectly Inelastic Demand
demand for which the demand curve is VERTICAL, in a way such that that the quantity demanded is always the same no mater what the price
Unit-Elastic
demand that has an absolute value of elasticity exactly equal to 1
Elastic
demand that has an absolute value of elasticity greater than 1
Inelastic
demand that has an absolute value of elasticity less than 1
