Econ Chapter 5
What direction do price and quantity change in?
Opposite directions
Price of elasticity of demand formula
Percent change in quanitity demanded divided by percent change in price
Price Elasticity if Supply Formula
Percent change in quantity supplied divided by percent change in quantity price
Income Elasticity of Demand Formula
Percentage change in quantity demanded Divided by Percent Change in Income
Cross Elasticity of Demand Formula
Percentage change in quantity demanded of a good Divided by Percentage change in the price of one of its substitutes or complements
Income Elasticity of Demand
measure of the extent to which the demand for a good changes when income changes, other things remaining the same.
The Midpoint Method
((New Price - Initial Price divided by (New Price + Initial Price divided by 2)) times 100
Percent Price in Change Formula
(New price - initial price divided by initial price) times 100
Influences on the price elasticity of demand fall into what two categories?
1.Availability of substitutes 2.Proportion of income spent
Two main influences on the price elasticity of supply are?
1.Production possibilities 2.Storage possibilities
Total Revenue- If demand is elastic...
A given percentage rise in price brings a larger percentage decrease in the quantity demanded. Total revenue decreases.
Total Revenue- If demand is inelastic...
A given percentage rise in price brings a smaller percentage decrease in the quantity demanded. Total revenue increases.
Prportion of income spent
A price rise, like a decrease in income, means that people cannot afford to buy the same quantities. The greater the proportion of income spent on a good, the more elastic is the demand for the good.
Production Possibilities
Goods that can be produced at a constant (or very gently rising) opportunity cost have an elastic supply. Goods that can be produced in only a fixed quantity have a perfectly inelastic supply.
Total Revenue Test
If price and total revenue change in the opposite directions, demand is elastic. If a price change leaves total revenue unchanged, demand is unit elastic. If price and total revenue change in the same direction, demand is inelastic.
The cross elasticity of demand for a compliment is...
Negative A fall in the price of a complement of the good brings an increase in the quantity demanded of the good. The quantity demanded of the good and the price of one of its complements change in opposite directions
The cross elasticity of demand for a substitute is...
Positive A fall in the price of a substitute of the good brings a decrease in the quantity demanded of the good. The quantity demanded of the good and the price of its substitute change in the same direction.
Elasticity along a Linear of Demand Curve
Slope is constant, but Along a linear demand curve, demand is: Unit elastic at the midpoint of the curve. Elastic above the midpoint of the curve. Inelastic below the midpoint of the curve.
Availability of Substitutes
The demand for a good is elastic if a substitute for it is easy to find. The demand for a good is inelastic if a substitute for it is hard to find.
Narrowness of Definition
The demand for a narrowly defined good is elastic. The demand for a broadly defined good is inelastic.
Storage Possibilities
The supply of a storable good is highly elastic. The cost of storage is the main influence on the elasticity of supply of a storable good.
Cross Elasticity of Demand
a measure of the extent to which the demand for a good changes when the price of a substitute or complement changes, other things remaining the same
Price Elasticity of Demand
a measure of the extent to which the quantity demanded of a good changes when the price of the good changes.
Price Elasticity of Supply
a measure of the extent to which the quantity supplied of a good changes when the price of the good changes.
Total Revenue Test- Definition
a method of estimating the price elasticity of demand by observing the change in total revenue that results from a price change.
Supply is PERFECTLY ELASTIC if...
an almost zero percentage change in price brings a very large percentage change in the quantity supplied.
If price elasticity of demand is greater than 1...
demand is elastic
If price elasticity of demand is less than 1...
demand is inelastic
If price elasticity of demand equals 1...
demand is unit elastic
If the price elasticity of supply is greater that 1
supply is elastic
If the price elasticity of supply is less than 1
supply is inelastic
If the price elasticity of supply equals 1
supply is unit elastic
Total Revenue
the amount spent on a good and received by its sellers and equals the price of the good multiplied by the quantity of the good sold.
Demand us UNIT ELASTIC if...
the percentage change in the quantity demanded equals the percentage change in price.
Demand is ELASTIC if...
the percentage change in the quantity demanded exceeds the percentage change in price
Demand is INELASTIC if...
the percentage change in the quantity demanded is less than the percentage change in price.
Supply is UNIT ELASTIC if...
the percentage change in the quantity supplied equals the percentage change in price.
Supply is ELASTIC if...
the percentage change in the quantity supplied exceeds the percentage change in price.
Suppli is INELASTIC if...
the percentage change in the quantity supplied is less than the percentage change in price.
Supply is PERFECTLY INELASTIC if...
the percentage change in the quantity supplied is zero when the price changes.
Demand is PERFECTLY ELASTIC if...
the quantity demanded changes by a very large percentage in response to an almost zero percentage change in price.
Demand is PERFECTLY INELASTIC if...
the quantity demanded remains constant as the price changes.
To determine the price elasticity of demand
we compare the percentage change in the quantity demanded with the percentage change in price.
