econ chap 4 - elasticity

elasticity

a measure of how much consumers and producers will respond to a change in market conditions

what can elasticity be applied to

both supply and demand

what does elastciity meausre

responses to a change in the price of a good, c ahnge in the price of a related good, or a chnage income

elasticity allows for people to anticipate what

how OTHERS WILL RESPOND to chanages in market conditions

price elasticityc of demand/supply

how much the quantity demanded/supplied changes when the price of a good changes

cross price elasticity of demand

how much the demand curve shifts when the price of another good changes

income elasticity of demand

how much the demand curve shifts when consumers incomes change

price elasticity of demand

the size of the change in the quantity demanded of a good or service when its price changes

quantity demanded generally decreases when…

price increases

when is something more elastic

when consumers buying decisions are highly influenced by price

• small change in price → large change in quantity demanded

when is something more inelastic

when consumers are not very sensitive to price changes

price elasticity is the percentage change of what

percent change in the quantity of a good that is demanded in response to a given percentage change in price

price elasticity of demand eq

% change in Q demanded/ % change in P

mid-point method

method that measures percentage change in quantity demanded (or quantity supplied) relative to a point midway between two points on a curve; used to estimate elasticity

percent change in quantity demanded formula

q2-q1/avg of q = q2-q1/(q2+q1/2)

percent change in price formula

same as quanity demanded but with p1 and p2

price elasticity of demand

put both percent change in price and quantity demanded together

-1.38 price elasticitty of demand means?

1 percent increase in the price → 1.38 percent DECREASE in the quanitity of the product demanded

the price elasticity of demand will ALWAYS BE A ____ NUMBER

NEGATIVE

positive change in price will cause..

negative change in the quanitity demanded

negative change in price will cause…

posiutive change in the quanitity demanded

some economists drop the negative sign of elasiticity of demand

yes. do not be fooled, price elasiticty of demand is ALWASY nagtive, whether or not its printed.

• think of it in ABSOLUTE VALUE

determinants of price elasticity of demand

• availability of subsitutes

• relative need and relative cost

• the time needed to adjust to price changes

availability of subsitutes

• if close subs are available for a goo then the demand for that good with be MORE ELASTIC than if only distant subs are available

availability of subsitutes example

price elasticity of demand for cranberry juice = relativiely elastic

• if price is too high, consumers may switch to grape juice

degree of necessity

• when a good is a bsic necessity, people will buy it even if its price rises

• demand for socks/home heating during winter is not very elastic

• people want to maintain that level of comfort

demand for luxuries is likely to be more or less elastic?

more

• more ppl can eaisly do w out these when their prices rise

• heavily demands on circumstances

cost relative to income..

• if consumers spend a very small share of their incomes on a good, theur demand for the good will be less elastic than otherwirse

• if a good costs a very large proportion of a persons income, the demand for the good will be more elastic

goods often have much more elastic demand over….

the long run than over the short run

• adjusting to price changes takes some time

scope of the market

how someone defines the market changes how the ealsticity of demand changes

we dont always need to estimate elasticity precisiely to know that consumers will react differently to price changes for products

true - you can get a general idea from the shape of the demand curve

perfectly elastic demand

demand for which any increase in price will cause quantity demanded to drop to zero; represented by a perfectly horizontal line

perfectly inelastic demand

demand for which quantity demanded remains the same regardless of price; represented by a perfectly vertical line

graph for perfectly elastic/inelastic

elastic

demand that has an absolute value of elasticity greater than 1

• a given percentage change in the price ofa. good will causes an even LARGER PERCENTAGE CHANGE IN THE QUANITITY DEMANDED

inelastic

demand that has an absolute value of elasticity less than 1

• a given percentage change in price will cause a SMALLER percentage change in the quantity demanded

unit-elastic

demand that has an absolute value of elasticity exactly equal to 1

• percentage change in prices = percent change in quantity demanded

elastic, inelastic and unit-elastic graph

what will elasticity tell a manager

• determins whether price increase will causes total revenue to rise or fall

total revenue

the amount that a firm receives from the sale of goods and services; calculated as the quantity sold multiplied by the price paid for each unit

how does an increase in price affect total revenue

• quantity effect - decrease in total revenue that results from selling fewer units

• price effect - increase in total revenue that results from recieving a higher price for each unit sold

what happens when quantity effect outwieghs the price effect

a price increase will cause a drop in total revenue

what happens when price effect outweighs the quantity effect

a price increase will raise total revenue

when demand is elastic, a price increase causes a…

proportionally larger decrease in the quantity demanded, and the total revenue falls

when demand is inelastics, what happens with percentage change in price/quanitity demanded

the percnt change in price is LARGER than the percent change in quanitity demanded - price effect outweighs the quantity effect, and total revenue increases

what happens when price rises with inelastic demand

consumers will purchase less of a good when its prie rises, but the change in the quantity demanded will be proportionally less than the change in price

elasticity varies along the demand curve

TRUE. soooo it changes as you move along the curve, and it refers to one place at a timeon the curve

general rule of demand and elasticity

demand tends to be MORE ELASTIC WHEN PRICE IS HIGH

more INELASTIC when price is LOW

the ealsticity is different at different points along a linear demand curve

yes!!!

• going from 45 to 40 dollars is a much smaller difference in percnetage terms than ging from 10 to 5 dollars, even if the slope of the curve is the same between both sets of points

where does the maximum revenue occur

where the demand is unit-elastic

on a linear demand curve, what happens with revenue and price

revenue first increases as the rpice increases, and then decreases with higher prices

price elasticity of supply

the size of the change in the quantity supplied of a good or service when its price changes

what does price elasticity of supply measure

• producers responsiveness to a change in price, just as the price elasticity of demand measures consumers responsiveness to a change in price

• tells us how much quantity supplied changes as w emove along the supply curve

price elasticity of supply

% change in quantity supplied/ % change in price

price elasticity of supply

supply is perfectly elastic if…

teh quantity supplied could be anything at a given price, and is zerio at any othe rprice

supply if perfelctly inealstic if…

the quantitity supplied is the same, regardless of the price

three factors that are detemrinants of a supplies ability to expand production

• availbility of inputs

• flexbility of the production process

• time needed to adjust to changes in price (same w the elasticity of demand)

avalilibity of inputs

• elasticity of supply depnds on the elasticity of the supply of inputs

• higher and higher prices will be needed to convince the producer to go to the extra expense

flexibility of the production process

• easiest way for producers to adjust the quantity supplies = draw production capacity away from other goods when its price rises / to reassign capacity to other goods when its price falls

adjustment time

supply is more elastic over long perods than over short periods

• prodcuers can make more adjustments in the long run than in the short run

two other types of demand elasticities

• cross price elasticity of demand

• the income elasticity of demand

cross-price elasticity of demand

a measure of how the demand for one good changes when the price of a different good changes

cross price elasticity of demand between A and B

% change in quantity of A demanded / % change in price of B

nonprice determinant of cross-price elasticity

the price of a subsititue or a complement - entire demand curve shifts

• measure this by obsvering the change in quantity demanded

cross price elasticity of demand for substitutes

positive - an increase in the price of one will cause and increase in the quantity demanded of the other

corss price elasticity of super close substitutes

very close - a change in the price of one will cause a large change in the quantityu demanded of the other, so that cross price elasiticity will be HIGH

cross price elasticity is neagtive when…

two goods are complements (consumer togetehr)

the realtive size of elastciityc tells us how strongly the two goods are…

linked! strong complements = CP elasticity is a large NEG number

two goods r loosley linked = CP elasticity will be negative

income elasticity of demand

a measure of how much the demand for a good changes in response to a change in consumers’ incomes

income elasticity of demand formual

percent change in quantity demanded / percent change in income

necessities and luxuries are normal good, but…

the sizes of their income elasticityes are VARIED

if the good is a necessity, income ealsiticty of demand will be…

positive and less than 1

if the good is a luxury, income ealsiticty of demand will be…

greater than 1

when is income ealsicity of demand negative

for inferiro goods - bc quantity demanded decreases as incomes increase

FOUR MEASURES OF ELASTICITY