Studied by 0 people
Looks like no one added any tags here yet for you.
what is elasticity?
Elasticity is a measure of how much the quantity demanded or supplied of a good responds to changes in price or income. It indicates the sensitivity of consumers or producers to price changes.
what does the price elasticity of demand for a good measure?
it measures how willing consumers are to buy LESS of it as prices RISE
what are the rules of thumb for price elasticity?
Generally, if the price elasticity is greater than 1, demand is elastic, meaning consumers are sensitive to price changes; if it is less than 1, demand is inelastic, indicating consumers are less responsive to price changes.
availability of close substitutes and price elasticity
goods with close substitutes have more elastic demand
it is easier to switch one good with another
goods that don’t have close substitutes have less elastic demand
there is no good replacement — people will keep buying the good
necessities and luxuries with price elasticity
true necessities are less elastic
consumers will buy them regardless of price changes
luxuries are more elastic
consumers will stop buying them if they get more expensive (think watches and purses)
this does depend on a buyer’s preference
definition of the market and price elasticity
a more narrowly defined market are more elastic
there are more substitutes, people are less likely to stick to the product if the price goes up
broader markets are less elastic
there are less substitutes, people are more likely to stick to the broad category
time and price elasticity
demand becomes more elastic over time
as time goes on, people will find more and more substitutes
demand is less elastic in the short term
quantity demanded only falls slightly in the first few months
what does a larger price elasticity imply
greater responsiveness of quantity demanded to price changes
the larger the price elasticity of demand is, the more sensitive consumers are to price fluctuations
midpoint method formula
demand curves and elasticity
The flatter the demand curve at a given point, the greater the price elasticity of demand
The steeper the demand curve at a given point, the smaller the price elasticity of demand
inelastic curves look like the letter I (a vertical line)
perfectly elastic is a horizontal line (tiny changes in price leads to huge changes in the quantity demanded
what is total revenue
the amount paid by buyers and received by sellers of the good
how will total revenue change as you move along the demand curve?
inelastic: increase in price = increase in total revenue
elastic: increase in price = decrease in total revenue
when demand is inelastic (price elasticity less than one) — price and total revenue moves in the same direction: if price increases, total revenue increases
when demand is elastic (price elasticity greater than one) — price and total revenue move in opposite directions: if price increases, total revenue decreases
unit elastic (price equals to one) — total revenue remains constant when price changes
is the elasticity the same if the slope of a linear demand curve is constant?
no
what is income elasticity of demand?
it measures how quantity demanded changes as consumer income changes
what do higher/lower income elasticities mean?
higher income = higher quantity demanded
normal goods = more positive income elasticities
inferior goods = more negative income elasticities
How does the quantity demanded of one good respond to a change in the price of another? and how do you calculate it?
Substitute goods (goods that are typically used in place of one another) = positive cross-price elasticity
Complement goods (goods that are used together) = negative cross-price elasticity
ex) increasing the price of computers reduces the quantity of software demanded
what does price elasticity of supply measure?
how much the quantity supplied responds to changes in the price
Supply is elastic if – quantity supplied responds substantially to price changes
Supply is inelastic if – quantity supplied only responds slightly
what does price elasticity of supply depend on?
the flexibility of the sellers to change the amount they produce
something you can’t make more of or change the manufacturing as much is more inelastic (like land)
manufactured goods are more elastic (you can run factories more in response to higher prices)
time
supply is more elastic in the long run versus the short run
in the short run, it is hard to make changes to production, but in the long run, you can change lots of things (build new factories, new firms can enter a market)
how do you calculate price elasticity of supply
explain the difference between supply curves
