CHAPT XIX

Price elasticity of demand

Percent change QD/%Change price

Unit elasticity of demand

1% change in demand, 1% change in price

inelastic demand

A given percentage change in price will result in a less that proportional change in in Qd

Elastic demand

A 1% change in demand

Perfectly inelastic demand

A demand that exhibits zero responsiveness to price changes

Perfectly elastic demand

A demand that has the characteristic that even the slightest increase in price will lead to 0 quality demanded

Determinants of the price elasticity of demand

Existence and no. of substitutes, share of consumers budget devoted to segment, length of time allowed for adjustments

Cross price elasticity of demand

Change Qd/% price in related good

Gini coefficient

On a graph with the cumulative percentage of money income measured along the vertical axis and the cumulative percentage of households measured along the horizontal axis, if A is the area between the line of perfect income equality and the Lorenz curve and B is the area beneath the Lorenz curve, the Gini coefficient equals A/(A+B)

Income elasticity of demand

The percentage change in the amount of a good demanded, holding its price constant, divided by the percentage change in income. The responsiveness of the amount of a good demanded to a change in income, holding the good’s relative price constant.

Income velocity of money

The no. of times per year a dollar is spent on final goods and services.

Price elasticity of demand

The responsiveness of the qd of a commodity to changes in its price; defined as the percentage change in Qd/%Change in price

Price elasticity of supply

The responsiveness of the Qd of a commodity to a change in its price - the percentage change in Qs/% change in price

Income elasticity of demand

Ei = % changeQd/% Change in income

Price Elasticity of supply Es

Es = %ΔQs/%ΔPl

Perfectly elastic supply

A supply characterized by a reduction to zero quantity supplied when there is the slightest decrease in price.

Perfectly inelastic supply

A supply characterized by a reduction in Qs remains constant no matter what the price

At what specific point of price elasticity is total revenue maximized?

Total revenue is maximized when price elasticity of demand is exactly -1

If demand for a product is inelastic, how should a firm change its price to increase total revenue?

The firm should raise the price; since consumers are relatively unresponsive, the gain from the higher price outweighs the small drop in quantity

If demand for a product is elastic, what happens to total revenue if the firm raises the price?

Total revenue will fall because the percentage drop in quantity demanded will be greater than the percentage increase in price

What does the presence of many easy substitutes imply about the price elasticity of demand for a good?

It implies demand is relatively elastic, as consumers can easily switch to another option if the price increases.

If demand is perfectly inelastic (like a vertical line), who pays the entirety of a new production tax?

The consumers bear the entire burden of the tax because their quantity demanded does not change regardless of the price increase.

Who bears the full burden of a tax if the demand for the product is perfectly elastic?

The producers bear the entire burden because they cannot pass any of the tax cost to consumers without losing all sales.