Microeconomics - Chapter 4

Elasticity

what’s the difference if a demand is elastic or inelastic

an inelastic demand means that the change of price will not affect the quantity demanded

elastic demand means that the change of price will have massive effect on the quantity demanded

what does the elastic demand tells us when price go up

in an elastic demand, if price goes up, it will have a double effect on the quantity demanded

what’s the measurement for an elastic demand

it must be greater than 1 for it to be counted as elastic demand

what’s the measurement for inelastic demand

it must be less than 1 for it to count as an inelastic demand

what’s the measurement for unit elastic

unit elastic are equal to 1

what’s the measurement for perfectly inelastic

perfectly inelastic are equal to zero

what’s the measurement for perfectly elastic

perfectly inelastic is equal to infinity

How do you measure the price elasticity demand?

what are the two variables that determines the elasticity of demand and how do they do it

1. Availability of substitutes - the more substitutes they are available in the market, the higher the elasticity of the good will be since consumers can easily switch from one product to another depending on the price
   

2. Short run and long run - In the short run, goods will be more inelastic since they don’t have a solution right away if the price increase. For example, if the price of gas increases, they don’t have choice but to purchase gas since they need it to go to work.
   

   In the long run, goods will be more elastic since people have more time to adjust from a price increase. If people found out that gas will be more expensive, then they will have time to acquire gas efficient vehicles or electric cars.

if an elastic good decides to increase its price, what will happen to the quantity demanded and total revenue

If an elastic good decides to increase its price, the consumers for that good will be sensitive to the price increase, resulting for people to not purchase that product and decreasing the quantity demanded. As a result, the decrease of quantity demanded will lead for the total revenue to go down.

If an elastic good decides to decrease its price, what will happen to the quantity demanded and total revenue?

If a good is elastic and the company decides to decrease its price where consumers are sensitive with changes in price. The decrease of price will increase the quantity demanded for that product leading for the total revenue to increase.

If an inelastic good decides to increase its price, what will happen to the quantity demanded and total revenue?

An inelastic good will have consumers that does not care about the price. Therefore, if the company decides to increase its price, the quantity demanded would decrease a little, but the total revenue would still increase.

If an inelastic good decides to decrease its price, how would this affect the quantity demanded and total revenue?

If an inelastic good decides to decrease its price, it would increase the quantity demanded by a bit; however, even with the quantity demanded increasing, the total revenue would still decrease.

If a good is unit elastic and they decide to change its price, how would this impact the quantity demanded and total revenue?

If a unit elastic good decides to whether increase or decrease in price, the quantity demanded can increase and decrease, but the total revenue will remain unchanged.

What is price elasticity of supply?

Price elasticity of supply shows how much supplies will increase/decrease from the change of price

How do you solve price elasticity of supply?

what’s excise tax

Its the tax that are distributed between the consumers and the producers. However, the amount of tax that will be distributed between parties will depend on the elasticities of supply and demand

If a good has an inelastic demand with elastic supply, how will the distribution of excise tax will happen?

If a good has an inelastic demand with elastic supply, it means that no matter what price level it is, there will be a demand for that product, which will increase the supply causing a rightward shift on the supply curve.

The distribution of tax will happen by distributing most of the excise tax to consumers since producers know that their good has an inelastic demand, meaning even if the good they are offering has a high price level, their goods will still be purchased.

If a good has an inelastic supply, but an elastic demand, how will the distribution of excise tax will happen?

The demand line will be less steep since its an elastic demand, meaning consumers are sensitive to price change. Therefore, producers will decide to distribute most of the excise tax to them to not lose any customers.

How do you solve for the income elasticity of demand?

in an income elasticity of demand, what variables are you trying to figure out

The goal is to find out whether the good is a normal good or inferior good

How would you know if its a normal good

Its a normal good if the ny (income elasticity of demand) is more than zero or a positive number

How would you know if a good is an inferior good?

It will be counted as inferior good if the ny (income elasticity of demand) is less than zero, which is a negative number

What’s the good in solving cross elasticity of demand?

To figure out whether the good is a substitute or a complement

How do you solve cross elasticity of demand?

How would you know if a good is a substitute good?

Its a substitute good if the nxy (cross elasticity of demand) is greater than zero or a positive number

How would you know if a good is a complement good?

It’s a complement good if the nxy (cross elasticity of demand) is less than zero or negative