Microeconomics Chapter 6 Elasticity

Price elasticity of demand

the responsiveness (or sensitivity) of consumers to a price change

Midpoint formula

used for calculating elasticity

Elastic

if demand is a specific percentage change in price results in a larger percentage change in quantity demanded (greater than one)

Inelastic

if a specific percentage change in price produces a smaller percentage change in quantity demanded (less than 1)

Unit of elasticity

When elastic and inelastic demand equals one

Perfectly inelastic

where a price change results in no change whatsoever in the quantity demanded

Perfectly elastic

where a small price reduction causes buyers to increase their purchases from zero to all they can obtain, the elasticity coefficients infinite

Total Revenue

the total amount the seller receives from the sale of a product in a particular time period

TR = P x Q

Total-revenue test

the easiest way to infer whether demand is elastic or inelastic

Demand is elastic

if total revenue changes in the opposite direction from price

Demand is inelastic

if total revenue changes in the same direction as price

When demand is elastic,

a decrease in price will increase total revenue

When demand is inelastic,

a price decrease will reduce total revenue

Inelastic Demand

insensitive to price changes and small change in quantity

Elastic Demand

sensitive to price changes and large change in quantity

Sustainability

more substitutes, demand is more elastic

Proportion of income

higher proportion of income, demand is more elastic

Luxury goods

demand is more elastic

Time

more available, demand is more elastic

Price elasticity of supply

measures a seller's responsiveness to price changes

Elastic price elasticity of supply

elastic supply, producers are responsive to price changes

Inelastic supply price elasticity of supply

producers are not as responsive to price changes

Price of elasticity results

E > 1 is elastic

E = 1 unit elastic

E < 1 is inelastic

E = 0 perfectly inelastic

Time periods

primary determinant of elasticity of supply, consists of immediate market period, short and long run

Time periods elastic ability

Long runs most elastic then short runs and immediate

Cross elasticity of demand

measures responsiveness of purchases of one good to change in price of another good

Substitute goods if elasitcity

is positive

Complement goods if elasticity

is negative

Independent goods if elasticity

is 0

Income Elasticity of Demand

measures responsiveness of buyers to changes in their income

A positive income of elasticity demand

normal goods

A negative income of elasticity demand

inferior goods

Most affected by a recession

high income elasticity

Not affected much by a recession

low or negative income elasticity

Consumer Surplus

arises in a market because some consumers are willing to pay more than the equilibrium price but don't need to do so