Chapter 6 Summary - Microeconomics: Principles, Problems, and Policies PDF

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Brief information from chapter 6 of "Microeconomics" by McConnell, Brue, and Flynn. ...

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Chapter 6 Summary Elasticity is the ability of something to change or adapt to changes at a particular rate. In economic terms, it is how changes in price affect supply and demand. The price elasticity of demand is the measurement of how sensitive or responsive consumers are to a price change in a product. If demand is elastic, then consumers are more likely to respond to price change. If inelastic, however, then consumers will not act so responsive to price change. This is best calculated by the formula: Ed = percent change in quantity demanded divided by the percent change in price. The determinants of elasticity of demand are as followed: substitutability, income, luxuries and necessities, and time. Demand is more elastic when the price is high and more inelastic when the price is low. The price elasticity of supply measures the sellers’ responsiveness to price change. If supply is elastic, then producers are more likely responsive to price changes. If supply is inelastic, then producers will not be responsive to price changes. The formula for price elasticity of demand is: Es = percent change in quantity supplied divided by percent change in price. Unlike its demand counterpart, time is the primary determinant. Both price elasticities of supply and demand follow the same rules when it comes to measurements. If E > 1, then demand/supply is elastic. If it is the other way, then demand/supply is inelastic. If E = 1, then demand/supply is unit elastic. In one extreme case, if E = 0, then demand/supply is perfectly inelastic. In another extreme case, in which it only affects the demand side, if E = ∞, then it is perfectly elastic. We can use elasticity to measure the expected total revenue. Total revenue is price times quantity. If we increase price when it is inelastic, quantity will go down, but total revenue will increase. If this happened on the elastic side, however, then total revenue will decrease. If price decreased on the inelastic side, quantity will go up, but total revenue will decrease. If switched to the elastic side, total revenue will go up. When total revenue is unit elastic, it remains unchanged. Two other formulas are on the demand side. The first one is cross elasticity of demand. It measures responsiveness of purchases of one good to change in the price of another good. This can used to compare the two products as either substitute, complementary, or independent goods. The other formula is the income elasticity of demand. It measures the responsiveness of buyers to changes in their income. This is also used to determine whether or not goods are either normal or inferior. We use elasticity measurements to charge different prices to different buyers to get the desired total revenue....