Ch 6. Elasticity The Responsiveness of Demand and Supply PDF

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The Price Elasticity of Demand and Its Measurement elasticity - a measure of how much one economic variable responds to changes in another econ omic variable price elasticity of demand - the responsiveness of the quantity demanded to a change in price, measured by divi ding the percentage change in the quantity demanded of a product by the percentage change in the product’s price - percentage change in quantity demanded / percentage change in price elastic demand - occurs when the percentage change in the quantity demanded is greater than the per centage change in price, so the price elasticity is greater than 1 in absolute value inelastic demand - occurs when the percentage change in quantity demanded is less than the percentag e change in price, so the price elasticity is less than 1 in absolute value unit-elastic demand - occurs when the percentage change in quantity demanded is equal to the percentage change in price, so the price elasticity is equal to 1 in absolute value midpoint formula -

price elasticity of demand =

Q 2−Q1 Q 1+Q 2 2

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P 2− P 1 P1+ P 2 2

difference between slope and elasticity - slope: changes in quantity and price - elasticity: percentage changes in quantity and price a. the flatter demand curve(smaller slope), the more elastic b. the steeper demand curve(larger slope), the less elastic perfectly inelastic demand - the case where the quantity demanded is completely unresponsive to price and the p rice elasticity of demand equals zero (vertical line) - No matter how much price may increase or decrease, the quantity remains the same. perfectly elastic demand - the case where the quantity demanded is infinitely responsive to price and the price e lasticity of demand equals infinity (horizontal line) - An increase in price causes the quantity demanded to fall to zero. cross-price elasticity of demand - measures the strength of substitute or complement relationships between goods - percentage change in quantity demanded of one good / percentage change in price o f another good - positive number: substitutes / negative number: complements / zero: unrelated income elasticity of demand - measures the strength of the effect of income on quantity demanded - percentage change in quantity demanded / percentage change in income - positive but less than 1: normal and a necessity / positive and greater than 1: normal and a luxury / negative number: inferior The Determinants of the Price Elasticity of Demand - the availability of close substitutes a. If a product has more substitutes available, it will have more elastic demand.

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b. If a product has fewer substitutes available, it will have less elastic demand. the passage of time a. The more time that passes, the more elastic the demand for a product becom es. b. takes some time for consumers to get adjusted to the change in price whether the good is a luxury or a necessity a. The demand curve for luxury is more elastic than the demand curve for a nec essity. the definition of the market a. The more narrowly we define a market, the more elastic demand will be. the share of the good in the consumer’s budget a. The demand for a good will be more elastic the larger the share of the good in the average consumer’s budget.

The Relationship Between Price Elasticity of Demand and Total Revenue total revenue - the total amount of funds a seller receives from selling a good or service, calculated b y multiplying price per unit by the number of units sold - elastic demand: increase in price, total revenue up - inelastic demand: increase in price, total revenue down - unit elastic demand: neither a decrease nor an increase in price affects revenue The Price Elasticity of Supply and Its Measurement price elasticity of supply

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the responsiveness of the quantity supplied to a change in price, measured by dividin g the percentage change in the quantity supplied of a product by the percentage cha nge in the product’s price

percentage change∈quantity supplied percentage change∈price Since the supply curve is always upward sloping, the price elasticity of supply will be a positive number, unlike that of demand. a. inelastic supply: < 1 b. elastic supply: > 1 c. unit elastic supply: = 1 d. perfectly inelastic supply: vertical line e. perfectly elastic supply: horizontal line...