AP Microeconomics 2.3 review

Elasticity

Sensitivity of producers and consumers to a change in price.

Price Elasticity of Demand

How consumers react to change in price.

Relatively Inelastic

Change in quantity demand is small compared to change in price. Meaning that price isn’t really a factor.

Inelastic

Insensitive

Relatively Elastic

Price change leads to large changes in quantity demanded. Price makes a big difference to consumers.

Elastic items have

many substitutes and are wants

Inelastic items have

few substitutes and are often needs

Price Elasticity of Demand (PED)

percentage change of quantity / percentage change of price

A perfect inelastic demand graph has

elasticity of 0 and its a perfect straight vertical line.

A Relatively Inelastic demand graph has

elasticity is less than 1 and its a vertical line.

A unit elastic demand graph has

elasticity of 1 and a diagonal line.

A Relatively elastic demand graph has

elasticity greater than 1 and a diagonal line closer to its horizontal side.

A perfectly elastic demand graph has

elasticity of infinity and its a horizontal line.

Percentage Change formula

New number - old number / old number

Elasticity of demand formula

new quantity - old quantity / old quantity OVER new price - old price / old price

The higher the price

the higher the elasticity

Total revenue formula

Price unit times quantity (P*Q)

Total revenues is maximized where

the demand curve is unit elastic

demand elastic: price decreases

revenues increases

demand elastic: price increases

revenue decreases

demand elastic on graph

price is too high for sellers to maximize revenue & % change in price causes big % change in quantity demanded

Demand unit elastic on graph

revenue is maximized

Demand Inelastic on a graph: Price decreases

revenue decreases

Demand Inelastic on a graph: Price increases

revenue increases

Demand Inelastic on a graph

Price is too low for sellers to maximize revenue & % change in Price causes less % change in quantity demanded.