Extensions of Demand and Supply Analysis

Flashcards covering extensions of demand and supply analysis.

Price elasticity of demand

Measures the responsiveness of quantity demanded to changes in price and helps suppliers in decision-making.

Modest changes in P cause very large changes in Qd

Relatively elastic

Substantial changes in P cause small changes in Qd

Relatively inelastic

Midpoint formula

It averages the two prices and the two quantities as the reference points to compute percentages.

Elastic demand

When %ΔQ > %ΔP

Inelastic demand

When %ΔQ < %ΔP

Unit elasticity

%ΔQ = %ΔP

Perfectly inelastic demand

%ΔQ=0

Perfectly elastic demand

%ΔP=0

Total revenue

Price (P) of product times quantity demanded (Qd)

Inelastic

Changes in P, “direct changes in TR

Elastic

Changes in Q, “direct changes in TR

Unit elastic

TR remains the same

Substitutability

The larger the number of substitute goods available, the greater the Ed, ceteris paribus.

Proportion of income

The higher the price of a good relative to consumers’ incomes, the greater Ed, ceteris paribus.

Luxuries versus necessities

The more a good is considered to be a ‘luxury rather than a ‘necessity’, the greater is the Ed.

Time

Product demand is more elastic the longer the time period under consideration.

Price elasticity of supply

Measuring responsiveness (sensitivity) of producers to price changes.

Relatively elastic

Modest changes in P cause very large changes in Qs

Relatively inelastic

Substantial changes in P cause small changes in Qs

Perfectly inelastic

Not enough time to shift resources

Inelastic supply

Resources not easily shifted to alternative uses

Relatively elastic

Resources easily shifted to alternative uses

Cross-elasticity of demand

measures how sensitive consumer purchases of one product (say X) are to a change in the price of some other product (say Y).

Substitute goods

Two different types of cool drinks

Substitute goods

↑ price of Y ↓ Qd of Y ↑ Qd of X

Complementary goods

↑ price of Y ↓ Qd of Y ↓ Qd of X

Independent goods

↑ price of Y ↓ Qd of Y Qd of X = 0

Income elasticity of demand

Measures the degree to which consumers respond to a change in their incomes by buying more or less of a particular good.

Normal goods

↑ income  ↑ Qd of X

Inferior goods

↑ income ↓ Qd of X

Consumer surplus

The benefit surplus received by a consumer or consumers in a market

Producer surplus

The benefit surplus received by a producer or producers in a market

Efficiency losses

The reductions of combined CS and PS associated with underproduction or overproduction of a product.