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Elasticity
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When demand curve is elastic
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Chapter 6
Microeconomics-
| Term | Definition |
|---|---|
| Elasticity | measure to responsiveness to changes in prices or incomes |
| When demand curve is elastic | an increase in price reduces the quantity demanded a lot (& vice versa) |
| Demand Curve is Inelastic when | when same increase in price reduces quantity demanded just a little, then the demand curve is inelastic |
| Elasticity is NOT EQUAL to slope but... | if two linear demand (or supply) curves run through a common point, then at any given quantity, the curve that is FLATTER IS MORE ELASTIC |
| Price elasticity of demand | the percentage change in quantity demanded divided by the percentage change in price |
| Midpoint formula | to avoid calculating different elasticities for rising vs falling prices, we calculate the price elasticity of demand using midpoint formula for percentage changes/instead of dividing by the initial quantity or price, we'll use the average quantity/price |
| If the Price of a sushi roll drops from $8 to $4 and sales rise from 20 to 40 units, what is the (absolute value) of the price elasticity of demand? | 2 |
| |ED|<1 | demand curve is inelastic |
| |ED|>1 | demand curve is elastic |
| |ED|=1 | demand curve is unit elastic |
| Total revenue | price times quantity demanded (sold) TR=PxQ -sellers need to know how elastic their good is so they can plan |
| When demand is inelastic | the price effect dominates the quantity effect -increase in price will cause only a slight reduction in the quantity demanded and in this instance total revenue will rise when the price rises (& vice versa) |
| When demand is elastic | quantity effect dominates the price effect -increase in price will cause significant reduction in the quantity demanded and in this instance total revenue will fall when the price rises (and vice versa) |
| when demand is unit-elastic | quantity effect equals the price effect SO an increase in price exactly balances the reduction in the quantity demanded-in this instance total revenue doesn't change |
| The elasticity of demand for eggs has been estimated to be 0.1. If egg producers raise their prices by 10 percent, what will happen to their total revenue? | It will increase |
| If a fashionable clothing store raised its prices by 25% what does that tell you about the store's estimate of the elasticity of demand for its products? | They think it's inelastic |
| What Factors Determine the price elasticity of demand? | 1. the availability of close substitutes is very important 2. Whether the good is a necessity or a luxury also affects the elasticity of demand 3. The share of income spent on the good matters 4. length of time elapsed since the price change matters |
| Cross-price elasticity of demand | measures how sensitive the quantity demanded of good A is to the price of good B |
| For substitutes, cross-price elasticity of demand is... | positive -an increase in the price of one brand of cookies will increase the demand for other brands |
| For complements, cross-price elasticity of demand is... | negative -increase in the price of milk causes a decrease in demand for oreos |
| Income Elasticity of Demand | measures how sensitive the quantity demanded of a good is to changes in income |
| For normal goods, income elasticity is......... | positive |
| For inferior goods, income elasticity is.............. | negative |
Created by:
kthomas96