Chapter 5 (Lecture & Reading)
"If you lower the price when you are at the inelastic section of the "demand, price elasticity, and total revenue" you'll see an _____ of the total revenue
Decrease
Price Elasticity of Supply - Shifts/Changes, Idea
Depends on how flexible your business can be
"When the Elasticity < 1 : People are sensitive to a change in price which means curve is ____ as the % change in quantity is ___ than the % change in price, the quantity is not responsive to changes in price and hence the demand curve is ____ which means that we are _____ to price change and will search for a _____
Elastic, larger, not steep, susceptible, substitute
"Unit elasticity = 4 means its is ___ since anything above 1 is elastic which means people are sensitive to ____
Elastic, price change
"Which effects dominate, ____ will give us the answer but essentially it depends on how sensitive people are to ______
Elasticity, price change
(END) Supply is more elastic when
Firms have flexibility
"When the price is lowered asses the
Gain vs lose"
"When you have a price vs. quantity curve that is gradual (non-steep) it means that people have a ______ or _____ curve sensitivity to a price change
High, elastic
Price Elasticity of Demand
How buyers respond to price changes
Price Elasticity of Demand - Rough
How does price change affect consumers, the buyers willingness to pay
Elasticity - Main Question
How good is your substitute and the price of them will determine how sensitive you are price changes
Price Elasticity of Supply
How much sellers change the quantity they produce if the price changes
Price Elasticity (Rough)
How responsive/flexible people are to price changes
Elasticity vs Cross - Price Elasticity of Demand - Equations Difference
In the cross you're comparing two different (complementary/substitute) goods and don't take the absolute value vs in the elasticity you are comparing the same product
"If you lower price when you are at the elastic section of the "demand, price elasticity, and total revenue" you'll see an _____ of the total revenue
Increase
(REVIEW) "When there is a right shift in the demand curve and there's an increase in immigration
Increase in demand
(REVIEW) "When there's a line forming it tells firms that they can ____ which gives companies an incentive to _____ but at the same time ____, which enables a new _____
Increase price, crank up consumption, people will drop out, equilibrium quantity and price
"Highly Inelastic demand means that as the price change increases the total revenue will
Increase"
"The cross-price elasticity is 0 it means that the goods are
Independent
"Change in use is small compared to change in the price then your demand is ____
Inelastic"
"Necessities have _____ demand
Inelastic"
"Demand curve for water for the first gallon is ____but after time it becomes more ____
Inelastic, elastic
"When the Elasticity < 1 : People are not sensitive to a change in price which means curve is ____ as the % change in quantity is ___ than the % change in price, the quantity is not responsive to changes in price and hence the demand curve is ____
Inelastic, smaller, very steep
Income Elasticity of Demand Cross-Price, Elasticity of Demand, Price Elasticity of Supply - Rough
It measures the percent changes in quantity demanded that follows from a 1% price
"You can have a horizontal demand curve when you have ____
Large amount of substitutes
"Supply is elastic= change in quantity suppliers are willing to sell is _____ than the percentage change in price
Larger"
Price Elasticity of Supply - Graphical Trend
Law of supply leads for this graph to be positive
"When you have a price vs. quantity curve that is steep it means that people have a ______ or _____ curve senstiviy to a price change
Low, inelastic
"If demand elastic, a ____ price yields less revenue
Lower
(END) Knowing weather price elasticity is > 1 or < 1 can help business
Maxime revenue
Elasticity - Definition
Measure how much quantities demanded and suppplied respond to changing market conditions
Price Elasticity of Supply - Definition
Measures how responsive sellers are to price changes
"The higher (+) the income elasticity of demand tells us that people are ___ willing to do/take this good (very sensitive)
More
"Factor: How hard it is to search: When it is easy to find (higher accessibility) an alternative, your demand for things become
More elastic"
"Factor: Long periods of time: When you have more time to figure out how to adjust to higher prices your demand for things over time become,
More elastic"
(REVIEW) "Supply curves shifts (same number of buyers and willingness to curve) then the demand curve ____
Moves
Price Elasticity of Demand - Graph Trend
Negative
(END) Income elasticity is positive for ____ and negative for ____
Normal good, inferior goods
"Highly inelastic means that there is _____
Not a good substitute
"If there are no substitutes
your demand is high (inleastic)"
Review - Elasticity (Formula) * Take the absolute value
|% change in quantity demanded/% change in price|
Total Revenue w. Elasticity - Changes, 2 1. Increase price: 2. Decrease price
Receiver higher price/unit but sell fewer units Sell more units
(END) Elasticity measures the
Responsiveness of quantity to other factors
"A higher price yields more _____ if the demand is inelastic
Revenue
(REVIEW) "If there is a shift on the supply via (e.g fracking) the _____ shift will lead firms to ____ however they will have to ____ price
Rightward , increase quantity produced, drop
Importance of Elasticity, Businesses
Sellers set their price and predict their revenue
"Low price elasticity means people are not _____
Sensitive to price change"
"Over time as business have more time to adjust but they would be more
Sensitive to price changes"
(REVIEW) "If we price below equilibrium we would be at a _____
Shortage
"The lower (+) the income elasticity of demand tells us that people are ___ willing to do/take this good (less sensitive)
Somewhat
(END) Demand is more elastic when
Substitutes exists
(END) Cross-price elasticity is positive for ____ and negative for ____
Substitutes, compliments
(REVIEW) "If we price above equilibrium we would be at a _____
Surplus
Price Elasticity of Supply - Rough
The larger % change in quantity supplies = More responsive sellers are to price changes
"The more competing products there are =
The more elastic the demand is for that good"
"Better substitute of a good =
The more willing you'll be to respond to a price rise by buying something else"
"The elasticity of water is categorized as _____ which means people are not sensitive to price change because once you get past one gallon a day (after it becomes less valuable)
Very elastic
High Elasticity = Flexible = Inelastic (Rough) >1
You are more flexible meaning how much you respond to small changes in price
(REVIEW) "To quantify the shortage/surplus
You look at the price and make a horizontal line of difference from edge of supply and demand
Low Elasticity = Inflexible = Elastic (Rough)
Your decisions don't change much as the price changes
Key of Elasticity
Your next best alternative, substitute
Elasticity - Equation
e = Effect (% change in quantity demanded/ Cause (%change in the price)
"Supply is elastic = change in price will lead to a ____
increase in the price of production = increase quantity increases = greater profit"
Cross elasticity serves to
Compare two complementary goods
Price elasticity of demand
Ratio of the change in quantity to the change in price
Review - Cross Elasticity (Formula) <0 : Complements >0 : Substitutes =0 : Unrelates goods
% change quantity of good b/% change quantity of good b
Income Elasticity of Demand - Equation
% change in quantity demanded / % change in income
Cross - Price Elasticity of Demand - Equation
% change in quantity demanded / % change in price of another good
Price Elasticity of Demand - Standard Equation Issue: Depends on the starting point (eliminates directional problem regardless of price increase/decrease)
% change in quantity demanded/% change in price
"To determine the elasticity you need to calculate the
% change in the quantity over the % change in the price"
Price Elasticity of Supply - General Equation
% change in the quantity supplied / % change in the price
"The price elasticity of demand, equation magnitude can be considered as a percentage. For example, 2 means that there was an increase in price by 1% (or __) then the quantity supplied would've ____
(10%), Decreased by 2% (or 20%)
Elasticity - Graph Trends & Definitions
- (Above Point): Elastic - (@ Point) Unit Elastic: The point where the quantity per period = price per unit - (Below Point): Inelastic
"Cross - Price Elasticity of Demand - Types
- Complements are negative - Substitutes are positive
Income Elasticity of Demand - Types
- Normal goods are positive - Inferior goods are negative
"In an income elasticity of demand number line, the necessities are in between ____ while luxuries are ____ while they are both _____ goods
0-1 , +1 , normal
Price Elasticity (Price to Relative Budget) - Types, 2
1. Big-ticket items: Elastic demand 2. Inexpensive items: Inelastic demand
Elasticity of Demand - Calculation, Steps
1. Calculate the change in price 2. Calculate the change in quantity demanded 3. Calculate the absolute value of price elasticity of demand 4. Calculate total revenue 5. Interpret if the demand is elastics/inelastic and how that relates to total revenue and price change
Demand Elasticities (Interdependence Principle) - Concepts, 2
1. Cross-price elasticity of demand 2. Income elasticity of demand
Price Elasticity of Supply - Larger Determinants of Changes, 5
1. For firms that store inventories 2. When inputs are easily available (outsource) 3. For firms with extra capacity 4. When firms can easily enter and exit the market 5. When there's more time to adjust
Factors that can help you figure out how flexible suppliers are
1. More Availability of your inputs 2. More Inventories 3. More capacity 4. Easy entry 5. Time
Price Elasticity (more elastic)- Determinants, 6
1. More competing products (greater elasticity) 2. Specific brands rather (greater elasticity) than broad 3. Things aren't necessities 4. Consumer search/Better information 5. More time to adjust 6. Price relative to budget (varies)
"Effects of price increase, 3
1. More revenue per unit sold (price increase) 2. Fewer units sold 3. Elasticity tells us which effect dominates
"If heinz decides to increase the price by 10% and result demand quantity falls by 30% the demand is ____, total revenue would _____
3>1 = elastics, fall
Price Elasticity of Demand - Definition
A measure of how responsive buyers are to price changes
Cross-Price Elasticity of Demand - Definition
A measure of how responsive the demand of one good is to the price changes of another
Income Elasticity of Demand - Definition
A measure of responsive the demand for a good is to changes in income
"Price elasticity of demand must be assessed using the ____
Absolute value the magnitude of the price
"How do businesses use demand elasticity
Allows firms to forecast how price changes will affect revenues and profit
"In the income elasticity of demand number line, 0 means that the goods
Are not impact by the variation of income
Price Elasticity of Demand - Equation Magnitude Meaning Elasticity > 1 : People ___ sensitive to a change in price Elasticity < 1 : People ___ sensitive to a change in price
Are, Are not
"Price elasticity of demand reflects the
Availability of substitutes
"Demand is elastic = change in price will lead to a _____ change in quantity (____) = ____ revenue
Bigger, decrease, loss"
(END) Price elasticity of demand/supply measures how much
Buyers/sellers respond to price changes
"In between inelastic and elastic parts of the curve, elasticity is "1" where the gain ____ which is a section called the ___
Offsets the cost, unit elastic
"Price and quantity move _____ on the demand side
Oppositely
Price Elasticity of Supply - % Change in Price, Midpoint Equation
P2-P1/(P2+P1)/2) x 100 = %
"Kidney donors when they are unable to get paid would be ______ creating a shortage
Perfectly vertical supply (not elastic) and demand curve
Total Revenue - Equation
Price * quantity
"You take the absolute value when you are talking about: ______
Price elasticity of demand"
"From the law of demand we can use the _______ to determine how much quantity has decrease when the price ____
Price elasticity of demand, increases
"Businesses will lower their price at certain times when they know that their customers are _____
Price sensitive
Price Elasticity of Supply - % Change in Quantity Supplied, Midpoint Equation
Q2-Q1/((Q2+Q1)/2) x 100 = %
(END) Elasticity helps us understand how much the
Quantity demanded and supplied will change when the price changes
(REVIEW) "A shift in the demand (same value of production) will lead to a movement on the
Quantity on the supply curve
Price Elasticity of Demand - MidPoint Equation
Quantity: (Q2-Q1)/[(Q2+Q1)/2] * 100 Price: (P2-P1)/[(P2+P1)/2] * 100