topic 5

price elasticity

measure the responsiveness of the quantity demanded or supplied of a good to a change in its price

very responsive

describe elastic

elastic demand or supply curves

indicate that quantity demanded or supplied respond to price changes in a greater than proportional manner

inelastic demand or supply curves

where a given percentage change in price will cause a smaller percentage change in quantity demanded or supplied

unitary elasticity

a given percentage change in price leads to an equal percentage change in quantity demanded or supplied

infinite or perfect elasticity

extreme case where either the quantity demanded or supplied changes by an infinite amount in response to any change in price at all

zero elasticity

extreme case in which a percentage change in price, no matter how large results in zero change in quantity

constant unitary elasticity

a situation where a price change of one percent results in a quantity change of one percent

short run

when Qs and Qd are slow to react to changes in price and demand and supply are relatively inelastic

long run

when Qs and Qd are faster to react to changes in price and demand and supply are relatively elastic

tax incidence

what depends on the relative price elasticity of supply and demand

buyers bear most of the tax burden

what happens when supply is more elastic than demand

buyers bear most of the cost of the tax

what happens when demand is more elastic than supply

income elasticity of demand

percentage change in quantity demanded divided by the percentage change in income.

cross-price elasticity of demand

percentage change in the quantity demanded of a good divided by the percentage change in the price of another good.

wage elasticity of labor supply

percentage change in the quantity of hours supplied divided by the percentage change in the wage.

elasticity of savings with respect to interest rates

percentage change in the quantity of savings divided by the percentage change in interest rates.

inverse demand curve equation

Pd = (ex: 60-0.5 Qd)

1. calculate the corresponding Q for each price point
2. calculate the percentage change in quantity: |(change in Q)/(midpoint of Q)|= |(Q1- Q2)/(1/2*(Q1+Q2)|=
(don't forget absolute value)
3. calculate the percentage changes in price: (change in P)/(midpoint of P)= (P1 - P2)/(1/2*(P1+P2))=
4. calculate the elasticity: |(change in Q)/(change in P)|=

how do you find the elasticity price of demand

difference between consumers willingness to pay for something and the price they actually paid added up over all the units traded the surplus value they got from something over and above the the price

consumer surplus

midpoint formula

what is this formula

- when PED (or midpoint) is less than 1, this is inelastic demand
- at prices around this level, prices change, demand changes in the opposite direction by a smaller proportion. Quantity demand is not very sensitive to changes in price

how to know when after calculating if elasticity is in the neighborhood?