Chapter 4 Elasticity

a product's price elasticity of demand

the responsiveness or sensitivity of consumers price to a change

when demand for a product is relatively elastic....

consumers are very responsive to a price change

when demand for a product is relatively inelastic....

consumers do not respond much to price changes

what is the Ed formula used for?

to measure the responsiveness to price change

when Ed is greater than 1

demand is elastic; meaning as price increase higher than 10%, more than 10% of quantity goes down.

when Ed is less than 1

demand is inelastic; meaning is price increases higher than 10%, less than 10% of quantity goes down

when Ed is equal to 0

perfectly inelastic demand; when more than 10% price change, quantity stays unchanged

When Ed equals infinity

perfectly elastic

elasticity slope

a straight line of the demand curve, the slope is constant but the elasticity varies

what is the total revenue test

TR= P*Q

Elastic demand (TR)

if demand is elastic, a price decrease will increase total revenue.

Inelastic demand (TR)

if demand is inelastic, a price increase will increase total revenue

Unit elasticity (TR)

an increase or decrease in price leaves total revenue unchanged

What are the determinants of price elasticity of demand

sustainability, proportion of income, luxuries vs. necessities, and time

substainability

the larger the number of substitute good that are available, the greater the price elasticity of demand

proportion of income

other things equal, the higher the price of a good relative to consumer's incomes, the greater the price elasticity of demand.

luxuries vs necessities

the more that a good is considered to be a luxury rather than a "necessity", the greater is the price elasticity of demand

time

product demand is more elastic the longer the time period under consideration

a product's price elasticity of supply

The responsiveness or sensitivity of producers to a price change

the cross price elasticity of demand

measures how sensitive consumer purchases of one product are to change in the price of some related product (coffee vs tea)

what is the coefficient of cross elasticity of demand

Ex,y

When Exy is greater than zero...

X and Y are substitutes (most competitive)

when Exy is equal to zero ...

X and Y are unrelated

when Exy is less than zero,

X and Y are complements