Microeconomics - Elasticity of Demand

Elasticity

How much Quantity Demanded and Quantity Supply respond to a change in price or other determinants

Elastic

We care a lot about the price of a good

We will change behavior based on price

Ex. Deciding to buy gas at the cheapest location, or driving less when prices rise

Inelastic

We do not care greatly about the price

We will not change behavior very much based on price

Price Elasticity of Demand (E_d)

Measures how much the Q^d responds to a change in price

Formula 1:

(% change Q^d)/(%change price)

Formula 2 (midpoint method(if we dont have percent changes)):

If we dont have percent changes

True/False %change is relative, does not equal slope

TRUE

Elastic Demand

E>1

Flatter demand curve

When E>1, percent change in quantity(bigger gap) is > change in price (smaller gap)

Inelastic demand

E_d <1

Steeper demand curve

When E<1, percent change in price (bigger gap), is larger than percent change in quantity (smaller gap)

Unit elastic demand

E=1

Gaps are equal

Percent change in price will always equal percent change in quantity demanded, but inverse, one neg. While one positive

Perfectly elastc

E=♾

When the price elasticity of demand is perfectly elastic (𝜖=∞), consumers "decide" that they are willing to buy any quantity of the good, but strictly at one specific market price

Willing to buy any quantity, but only at one price

Price will never change

Ex. Perfectly competitive market(price takers-buyers and sellers who can’t influence the price)

Perfectly inelastic demand

E_d=0

No matter the price the quantity demand is always the same

Life saving medicine-epipen

Total revenue test definition and equation

Total revenue=PxQ

Amount paid by buyers and received by sellers

Total revenue test in elastic demand

If price increases, TR decreases

Further explanation, if consumers buy 40 goods at 1 dollar, and you raise the price to 2 dollars, and then consumers only buy ten, raising the price actually results in less TR because buyers have elastic demand and care a lot about the price

Total Revenue test in inelastic demand

If P increases, TR increase as well

Further explanation, if you sell goods at 1 dollar and 20 people buy them, then you raise them 4 dollars, and 10 people buy them, though quantity demanded decreases, the price and amount still demanded/purchased ‘cancels out’, bugger gap in p then Q^D

total revenue in unit elastic demand

In price increases or decreases, total revenue stays the same.

Price elasticity along a straight line demand curve(picture graph as answer)

Availability of close substitutes (many vs. few)

If many, demand is elastic because consumers can switch easily (coke and pepsi)

If few, inelastic, because you cannot switch easily (electricity), (if you feel youNEED a birkin)

Necessities vs luxuries

Necessity, inelastic, you need it

Luxury, elastic, you dont need it

Big ticket items

Lots of income, elastic

Small portion, inelastic

(Sorry these flash cards are more idgaf than the others cause its late at night)

Definition of market 🥀

If broad, inelastic, you cannot escape a the whole category (food)

If narrow, elastic, you can switch to close substitutes (ice cream -switch to diff. desert)

Time horizon

If short, inelastic, airport items

If long, elastic

For both: gas, you have to drive this week, and cannot switch cars, but over time you can buy an electric car