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Microeconomics Chp 6

QuestionAnswer
Price Elasticity of Demand Measures buyers’ responsiveness to price changes.
Elastic Demand: Sensitive to price changes. Large change in quantity demanded
Inelastic Demand: Insensitive to price changes. Small change in quantity demanded.
Ed > 1 demand is Elastic same for supply (Es)
Ed < 1 demand is Inelastic same for supply (Es)
Ed = demand is Unit elastic same for supply (Es)
Total Revenue = Price x Quantity
TR Test: Elastic demand Total Revenue increase = Elastic P and TR move in opposite directions
TR Test: Inelastic demand Total revenue decrease = Inelastic P and TR move in the same direction
TR Test: Unit elasticity demand Total Revenue stays the same TR does not change when P changes
Substitutability More substitutes, demand is more elastic Consumers are more likely to switch to an alternative good if the price of the main one rises
Proportion of income Higher proportion of income, demand is more elastic Consumers are more willing to spend more of their income on Normal goods Ex: Higher income = buying higher quality food items rather than cheap alternatives
Luxuries (Ed): Luxury goods, demand is more elastic Luxury goods are not essential, so consumers are willing to wait for price changes (sensitive to price)
Time (Ed): More time available, demand is more elastic With more time available, you can look for sales or alternatives but with less time, you'll have to settle regardless of price
Necessities (Ed): Demand is inelastic These items are essential and have limited substitutes, so consumers are unable to wait for price changes (insensitive to price) Ex: insulin prices
Price Elasticity of Supply Measures how fast the quantity supplied of a good or service changes in response to a price change
Elastic Supply: producers are responsive to price changes
Inelastic Supply: producers are not as responsive to price changes
Time (Es): Time is a primary determinant of Es Time periods considered: -Immediate market period -Short run -Long run
Short run period (Es) is inelastic, but more elastic than the immediate market period
Created by: Phillies55
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