Microeconomics Test 2

Elasicity

measure of the responsiveness of quantity demanded or supplied to changes in one of its determinants (how buyers and sellers change their behavior when the price changes)

Price of Elasticity of Demand

the measure of how much the quanitity demanded responds to a change in price

-Availability of close substitutes

-Whether a good is a luxury/ nessecity

-How broadly the market is defined

-Time horizon under consideration

Elastic Demand > 1

Quantity demanded resonds substantily to price changes

-Good with close substitute

-Luxury

-Narrowly defines markets

-Longer time horizons (plan to keep money invested for a while, 10+ yrs)

Inelastic Demand <1

Quantity demanded responds slightly to price changes

-Good with not close substitutes

-Nessecities

-Broadly defines markets

-Shorter time horizons (plan to keep money in for at least 3 yrs)

Unit Elasticity

=0 (when price changes, total revenue remains constant)

Price Elasticity of Demand (Midpoint Formula)

Demand= Perfectly Inelastic

-Price elasticity of demand= 0

VERTICAL

Demand= Perfectly Elastic

-Price elasticity of demand= ∞

HORIZONTAL

Total Revenue

-Amount paid by buyers and received by sellers of a good

-P times Q

Total Revenue & Elastic Demand

-Price and total revenue move in opposite directions (a change in price causes a larger percentage change in the quantity demanded)

-LINEAR: points with high price and low quantity

Total Revenue & Inelastic Demand

-Price and total revenue move in the same direction (the percentage change in price is larger than the resulting percentage change in quantity demanded)

-LINEAR= points with low price and high quantity

Income Elasticity of Demand

measures how much the quantity demanded of a good responds to a

change in consumers’ income

Positive Income Elasticity

Normal good

Negative Income Elasticity

Inferior good

Income Elasticity of Demand Formula

Cross Price Elasticity of Demand

measures how much the quantity demanded of one good responds to a

change in the price of another good

Positive Cross Price Elasticity

Subsitutes

Negative Cross Price Elasticity

Complements

Cross-Price Elasticity of Demand

Price Elasticity of Supply

Measures how much the quantity supplied of a good responds to a change

in the price of that good

Elastic Supply > 1

Quantity supplied responds substantially to price changes

-Long run (all markets are in equilibrium, and all prices and quantities have fully adjusted and are in equilibrium)

Inelastic Supply <1

Quantity supplied repsonds only slightly to price changes

-Short run (a period where at least one factor of production is fixed, while others can be adjusted)

Supply= Perfectly Inelastic

Price elasticity of supply= 0

VERTICAL

Supply= Perfectly Elastic

Price elasticity of supply= ∞

HORIZONTAL