BT

elasticity market value

  • Elasticity: A measure of how one variable responds to changes in another.

  • Price Elasticity of Demand (PED): Responsiveness of quantity demanded to price changes.

  • Elastic Demand: PED > 1; quantity demanded changes significantly with price.

  • Inelastic Demand: PED < 1; quantity demanded changes minimally with price.

  • Unit-Elastic Demand: PED = 1; quantity demanded changes proportionally with price.

  • Midpoint Formula: A consistent method for calculating elasticity across ranges.

  • Cross-Price Elasticity: Measures how demand for one good changes with price changes of another (substitutes or complements).

  • Income Elasticity of Demand: Reflects demand changes in response to income variations (normal vs. inferior goods).

  • Price Elasticity of Supply (PES): Responsiveness of quantity supplied to price changes.

  • Total Revenue: Total sales revenue affected by price elasticity.

Externalities and Market Failures

  • Externalities: Costs or benefits affecting third parties outside a transaction (e.g., pollution, education).

  • Market Failure: Inefficient allocation of resources due to unaccounted externalities.

  • Private Marginal Costs/Benefits: Direct costs or benefits for individuals or firms in a transaction.

  • Social Marginal Costs/Benefits: Total costs/benefits, including external effects.

  • Public Goods: Goods that are nonrival (use by one doesn’t reduce availability) and nonexcludable (cannot exclude others).

  • Free-Rider Problem: Under-provision of public goods due to individuals benefiting without contributing.

  • Property Rights: Legal rights to resource use, essential for managing resources efficiently.

  • Coase Theorem: States that with low transaction costs and clear property rights, externalities can be resolved through negotiation.

Highlights

Elasticity

Definition and Importance

  • Elasticity measures how changes in one variable (e.g., price) affect another (e.g., demand or supply).

  • Key to understanding consumer behavior, producer strategies, and market dynamics.

Price Elasticity of Demand (PED)

  • Formula: PED=%Change in Quantity Demanded%Change in Price\text{PED} = \frac{\% \text{Change in Quantity Demanded}}{\% \text{Change in Price}}PED=%Change in Price%Change in Quantity Demanded​

  • Always negative (inverse relationship between price and demand), but absolute values are used for comparison.

Types of Elasticity

  • Elastic Demand (PED > 1): Significant response in demand to price changes.

  • Inelastic Demand (PED < 1): Minimal response in demand to price changes.

  • Unit-Elastic Demand (PED = 1): Proportional response in demand to price changes.

Midpoint Formula

  • Ensures consistent results: PED=(Q2−Q1)/[(Q2+Q1)/2](P2−P1)/[(P2+P1)/2]\text{PED} = \frac{(Q_2 - Q_1) / [(Q_2 + Q_1)/2]}{(P_2 - P_1) / [(P_2 + P_1)/2]}PED=(P2​−P1​)/[(P2​+P1​)/2](Q2​−Q1​)/[(Q2​+Q1​)/2]​

Cross-Price Elasticity

  • Substitutes: Positive elasticity (e.g., Coke and Pepsi).

  • Complements: Negative elasticity (e.g., coffee and sugar).

Income Elasticity of Demand

  • Normal Goods: Positive elasticity (demand increases with income).

  • Inferior Goods: Negative elasticity (demand decreases with income).

Price Elasticity of Supply (PES)

  • Reflects responsiveness of quantity supplied to price changes.

  • Formula: PES=%Change in Quantity Supplied%Change in Price\text{PES} = \frac{\% \text{Change in Quantity Supplied}}{\% \text{Change in Price}}PES=%Change in Price%Change in Quantity Supplied​

Determinants of Elasticity

  • Demand Elasticity:

    • Availability of substitutes.

    • Necessity vs. luxury.

    • Proportion of income spent.

    • Time horizon.

  • Supply Elasticity:

    • Production flexibility.

    • Availability of inputs.

    • Time to adjust production.

Revenue Implications

  • Elastic Demand: Price increase → Decrease in total revenue.

  • Inelastic Demand: Price increase → Increase in total revenue.

  • Unit-Elastic Demand: Price changes → No change in total revenue.

Externalities and Market Failures

Definition of Externalities

  • Negative Externalities: Costs imposed on others (e.g., pollution).

  • Positive Externalities: Benefits enjoyed by others (e.g., education).

Market Failure

  • Occurs when externalities prevent efficient market outcomes.

  • Often requires policy interventions (e.g., taxes, subsidies).

Private vs. Social Marginal Costs and Benefits

  • Private Marginal Costs/Benefits: Direct costs or benefits for transaction participants.

  • Social Marginal Costs/Benefits: Includes external effects on third parties.

Public Goods and Free-Rider Problem

  • Characteristics of Public Goods:

    • Nonrivalry: One person’s use doesn’t reduce availability.

    • Nonexcludability: Cannot exclude others from using the good.

  • Free-Rider Problem: Under-provision when individuals benefit without paying.

Significance of Property Rights

  • Clear property rights ensure efficient resource allocation.

  • Lack of property rights leads to overuse or resource depletion.

Coase Theorem

  • Principle: Clear property rights + Low transaction costs → Negotiated solutions to externalities.

  • Limitations: High transaction costs or unclear property rights hinder applicability.