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Price Elasticity of Demand Formula
The formula is Ed = (% Change in Quantity Demanded) / (% Change in Price).
Total Revenue Formula
Total Revenue (TR) = Price (P) × Quantity Sold (Q).
Cross Elasticity of Demand Formula
The formula is Exy = (% Change in Quantity Demanded of Good X) / (% Change in Price of Good Y).
Income Elasticity of Demand Formula
The formula is Ey = (% Change in Quantity Demanded) / (% Change in Income).
Marginal Utility Formula
Marginal Utility (MU) = Change in Total Utility / Change in Quantity of Good Consumed.
Utility Maximizing Condition
The condition is MUx/Px = MUy/Py, where MU is marginal utility and P is price.
Consumer Behavior
The study of how individuals make decisions to spend their available resources on consumption-related items.
Utility
The satisfaction or benefit derived from consuming a good or service.
Marginal Utility Theory
The theory that consumers make decisions based on the additional utility gained from consuming one more unit of a product.
Budget Constraint
The limitation on the consumption choices of individuals based on their income and the prices of goods.
Indifference Curve
A graph showing combinations of two goods that give the consumer equal satisfaction and utility.
Consumer Equilibrium
The point at which a consumer maximizes their utility given their budget constraint.
Diminishing Marginal Utility
Consumer satisfaction decreases as more units of a good are consumed.
Income Effect
The change in demand for a good due to a change in consumer income.
Substitution Effect
The change in demand for a good resulting from a change in its price relative to substitute goods.
Consumer Surplus
The difference between what consumers are willing to pay for a good and what they actually pay.
Demand Curve
A graphical representation of the relationship between the price of a good and the quantity demanded.
Factors Influencing Elasticity of demand
availability of substitutes, proportion of income spent, necessity versus luxury, and time period.
Short-Run Elasticity
The price elasticity of demand measured in the short term, typically showing less elasticity due to consumer adjustments.
Long-Run Elasticity
The price elasticity of demand observed over a longer period, often showing greater elasticity as consumers fully adjust their behavior.
Total Revenue Effect
In elastic demand, lowering prices increases total revenue, whereas in inelastic demand, lowering prices decreases total revenue.
Consumer Expectation
Anticipated future price changes can affect current demand; if consumers expect prices to rise, current demand may increase.
Time Horizon
The timeframe over which consumers can adjust their purchasing behavior, affecting the elasticity of demand.
Market Definition
The specific definition of the market being analyzed can influence demand elasticity due to the availability of substitutes.
Advertising Effect
The impact of marketing and advertising on consumer preferences, potentially affecting demand elasticity.
Price Discrimination
The practice of charging different prices to different consumers for the same good, often based on elasticity differences among groups.
Availability of Substitutes
The more substitutes available for a good, the more elastic the demand; consumers can easily switch to alternatives.
Necessity vs. Luxury
Necessities tend to have inelastic demand while luxuries have more elastic demand; consumers view luxuries as optional.
Proportion of Income Spent
Goods that take up a larger share of a consumer's income typically have more elastic demand than those that do not.
Time Period
Demand elasticity can change over time; demand is often more elastic in the long run compared to the short run.
Consumer Preferences
Changes in consumer tastes and preferences can affect demand elasticity; shifts toward a product can increase elasticity.
Price Elasticity of Supply
A measure of producers' responsiveness to price changes, calculated as the ratio of the percentage change in quantity supplied to the percentage change in price.
Elastic Supply
Supply is considered elastic if the percentage change in quantity supplied results in a larger percentage change in price (Es > 1).
Inelastic Supply
Supply is considered inelastic if the percentage change in quantity supplied results in a smaller percentage change in price (Es < 1).
Unit Elastic Supply
Supply is unit elastic when the percentage change in quantity supplied is equal to the percentage change in price (Es = 1).
Perfectly Inelastic Supply
Supply that does not change at all with price changes (Es = 0), resulting in a vertical supply curve.
Perfectly Elastic Supply
Supply that is infinitely responsive to price changes (Es = ∞), resulting in a horizontal supply curve.
Factors Affecting Supply Elasticity
time period for adjustment, availability of factors of production, and production flexibility.
Short-Run Supply Elasticity
The price elasticity of supply measured in the short term, typically showing less elasticity as producers have limited adjustments.
Long-Run Supply Elasticity
The price elasticity of supply observed over a longer period, often showing greater elasticity as producers can fully adjust their production.
Price Elasticity of Supply
A measure of producers' responsiveness to price changes, calculated as the ratio of the percentage change in quantity supplied to the percentage change in price.
Factors Affecting Supply Elasticity
time period for adjustment, availability of factors of production, and flexibility in production methods.
Short-Run Supply Elasticity
The price elasticity of supply measured in the short term, typically showing less elasticity because producers have limited ability to adjust inputs.
Long-Run Supply Elasticity
The price elasticity of supply observed over a longer time frame, showing greater elasticity as producers can fully adjust their production levels.
Perfectly Inelastic Supply
Supply that does not change with price changes, resulting in a vertical supply curve (Es = 0).
Perfectly Elastic Supply
Supply that is infinitely responsive to price changes, resulting in a horizontal supply curve (Es = ∞).
Unit Elastic Supply
Supply is unit elastic when the percentage change in quantity supplied equals the percentage change in price (Es = 1).
Elastic Supply
Supply is considered elastic if changes in price result in larger percentage changes in quantity supplied (Es > 1).
Inelastic Supply
Supply is inelastic if changes in price lead to smaller percentage changes in quantity supplied (Es < 1).
Cross Elasticity of Demand Definition
indicates how the quantity demanded of one good changes in response to the price change of another good.
High Cross Elasticity
A high cross elasticity of demand (Exy > 1) indicates that the two goods are strong substitutes.
Low Cross Elasticity
A low cross elasticity of demand (Exy < 0) indicates that the goods are complements.
Income Elasticity of Demand Definition
measures how the quantity demanded of a good responds to changes in consumer income.
Normal Goods Income Elasticity
For normal goods, the income elasticity of demand is positive (Ey > 0); demand increases with income.
Inferior Goods Income Elasticity
For inferior goods, the income elasticity of demand is negative (Ey < 0); demand decreases as income rises.
Luxury Goods Income Elasticity
Luxury goods typically have an income elasticity greater than 1 (Ey > 1), indicating demand increases more than proportionally as income rises.
Necessity Goods Income Elasticity
have income elasticity between 0 and 1 (0 < Ey < 1), indicating demand increases less than proportionally with income.
High Income Elasticity
High income elasticity (Ey > 1) indicates luxury goods, where demand increases more than proportionally with income.
Low Income Elasticity
(0 < Ey < 1) indicates necessity goods, meaning demand increases less than proportionally as income rises.
Unit Income Elasticity
(Ey = 1) suggests that a percentage change in income results in an equal percentage change in quantity demanded.
Income Effect on Demand
refers to the change in quantity demanded of a good resulting from a change in consumer income.
Elasticity Categories
Goods are categorized based on income elasticity into normal goods (positive), inferior goods (negative), and luxury goods.
Relationship between Income and Demand
As consumer income increases, demand for normal goods increases while demand for inferior goods decreases.
Practice Problem: Price Elasticity of Demand
If the price of a good increases by 10% and the quantity demanded decreases by 20%, what is the price elasticity of demand?
Practice Problem: Total Revenue Test
If a company lowers the price of its product and total revenue increases, what does this indicate about the elasticity of demand for that product?
Practice Problem: Calculate Cross Elasticity
If the price of good Y rises by 5% and the quantity demanded of good X increases by 15%, what is the cross elasticity of demand between good X and good Y?
Practice Problem: Income Elasticity Calculation
If a consumer's income rises by 25% and the quantity demanded for a normal good increases by 10%, what is the income elasticity of demand?
Practice Problem: Demand Curve Analysis
Given the demand curve equation Qd = 100 - 2P, find the quantity demanded when the price is set at $20.
Practice Problem: Marginal Utility Maximization
If a consumer spends $30 on two goods and derives marginal utilities of 15 from good X and 10 from good Y, should they adjust their spending?
Practice Problem: Short-Run vs Long-Run Elasticity
Discuss how the elasticity of demand for gasoline is likely to differ in the short run compared to the long run.
Practice Problem: Utility Maximization Rule
A consumer has a budget of $50, prices of goods X and Y are $10 and $5 respectively. Determine the optimal consumption of each good if marginal utilities are equal.
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