ch6 (test 2): Price Elasticity

Price Elasticity of Demand

how much the quantity of a product people want to buy changes when its price changes. If demand changes a lot when price changes, it's elastic (like a luxury item or items with many substitutes); if it doesn't change much, it's inelastic (like medicine). 

Ed = percentage change in quantity demand / percentage change in price

Ed = %ΔQd / %ΔP

Midpoint formula for Ed

(ΔQd / Qd average) / (ΔP / P average)

Quantity demanded changes proportionately more than price changes

Elastic

Quantity demanded changes proportionately less than price changes

inelastic

Quantity demanded is extremely responsive to even very small changes in price

perfectly elastic

Quantity demanded does not change as price changes

perfectly inelastic

Total Revenue (TR)

Price times quantity sold (P x Q).

The price elasticity of demand for a
straight-line downward-sloping
demand curve varies from highly
elastic to highly inelastic

-In elastic range, lower price to
increase TR.
− In inelastic range, raise price to
increase TR

T/F: Total revenue is at its highest when
price elasticity of demand equals 1

True

Determinants of Price Elasticity of Demand: Number of substitutes

-More substitutes, the higher the price elasticity of demand.

-Fewer substitutes, the lower the price elasticity of demand.

Determinants of Price Elasticity of Demand: Necessities versus luxuries

-More of a luxury, the higher the price elasticity of demand
-More of a necessity, the lower the price elasticity of demand

Determinants of Price Elasticity of Demand: Percentage of one’s budget spent on the good

▪ Greater percentage of budget, the higher the price elasticity of demand
▪ Smaller percentage of budget, the lower the price elasticity of demand

Determinants of Price Elasticity of Demand: Time

▪ More time that passes, the higher the price elasticity of demand
▪ Less time that passes, the lower the price elasticity of demand

Cross Elasticity of Demand

how much the demand for one good changes when the price of another good changes.

(Cross Elasticity of Demand). Ec = percentage change in quantity demand of one good / percentage
change in price of another good

Ec = %ΔQdA / %ΔPB

Income Elasticity of Demand

how much people buy more or less of something when their income changes.

(Income Elasticity of Demand) EY = percentage change in quantity demand / percentage change in income

EY = %ΔQd / %ΔY

Price Elasticity of Supply

how quickly and easily producers can change the amount they supply when the price changes

(Price Elasticity of Supply) Es = percentage change in quantity supplied / percentage change in price

Es = %ΔQs / %ΔP