Percentage change in quantity demanded

percentage change in price

ΔQ/Qave

Price Elasticity of Demand:

Perfectly Inelastic Demand:

if the quantity doesn't change when the price changes, the price elasticity of demand is zero and the good has a perfectly inelastic demand

the demand curve is vertical

lEdl=0

Price Elasticity of Demand:

Unit Elastic Demand:

if the percentage change in the quantity demanded equals the percentage change in the price, the price elasticity of demand equals 1 and the good has unit elastic demand

a demand curve with ever declining slope

l%ΔQdl = l%ΔPl

Price Elasticity of Demand:

Inelastic Demand:

if the percentage change in the quantity demanded is smaller than the percentage change in price, the price elasticity of demand is less than 1 and the good has inelastic demand

l%ΔQdl < l%ΔPl

Price Elasticity of Demand:

Elastic Demand:

Price Elasticity of Demand:

Perfectly Elastic Demand:

if the percentage change in the quantity demanded is infinitely large when the price barely changes, the price elasticity of demand is infinite and the good has a perfectly elastic demand

has a horizontal demand curve

Price Elasticity of Demand:

Elasticity along a Straight-Line Demand Curve:

demand becomes less elastic as the price falls along a linear demand curve

at prices above the midpoint, demand is elastic

at prices below the midpoint, demand is inelastic

Price Elasticity of Demand:

Total Revenue:

the total revenue from the sale of the good or service equals the price of the good multiplied by the quantity sold (TR=PxQ)

when the price changes, total revenue also changes, but a rise in the price doesn't always increase total revenue

Price Elasticity of Demand:

the change in total revenue due to a change in price depends on:

Price Elasticity of Demand:

If Demand is Elastic:

Price Elasticity of Demand:

If Demand is Inelastic:

Price Elasticity of Demand:

If Demand is Unit Elastic:

Price Elasticity of Demand:

Total Revenue Test:

definition

a method of estimating the price of elasticity of demand by observing the change in total revenue that results from a price change (when all other influences on quantity sold remain the same)

Price Elasticity of Demand:

Total Revenue Test:

elasticity

• if a price cut ↑ total revenue, demand is elastic
• if a price cut ↓ total revenue, demand is inelastic
• if a price cut leaves total revenue unchanged, demand is unit elastic

Price Elasticity of Demand:

Expenditures & Elasticity:

• if your demand is elastic, a 1% Pcut ↑ the Q u buy by m> than 1% and your Expenditure on the item ↑
• if your demand is inelastic, a 1% Pcut ↑ the Q u buy by <l than 1% and the Expenditure on the item ↓
• if your demand is unit elastic, a 1% Pcut ↑ the Q u buy by 1% and you expenditure on the item does not change

Price Elasticity of Demand:

Factors that Influence the Elasticity of Demand:

• closeness of substitutes
• proportion of income spent on good
• time elapsed since a price change

Price Elasticity of Demand:

Availability of Substitutes:

the closer the substitutes for a good or service, the more elastic are the demands for it [Directly related]

• Necessities
• Luxuries

Price Elasticity of Demand:

Necessities:

such as food, shelter, water, etc.

goods that have poor substitutes and that are crucial for our well being

generally have Inelastic Demand over the useable price ranges

Price Elasticity of Demand:

Luxuries:

such as, exotic vacations, expensive cars, etc.

goods that usually have many substitutes, not buying the good is an option that does not decrease our well-being in a crucial way

generally have Elastic Demand over ther usable price ranges

Price Elasticity of Demand:

Share of budget spent of the Product:

Elasticity of demand is directly related to the percentage of one's budget spent for a good or service

the greater the proportion of income consumers spent on a good, the larger is its elasticity of demand

Price Elasticity of Demand:

Adjustment of a Price Change over Time:

In General, elasticity of demand is higher the longer a price change persists

the more time consumers have to adjust to a price change, or the longer that a good can be stored without losing its value, the more elastic is the demand for that good

Cross Elasticity of Demand:

a measure of the responsiveness of demand for a good to a change in the price of a substitute or a complement, other things remaining the same

• Ec>0=substitute good (right shift)
• Ec<0=Complement good (left shift)
• Ec=0= not related goods

Cross Elasticity of Demand:

Formula for calculating Cross Elasticity of Demand:

Percentage change in Quantity Demanded

Percentage change in the Price of a Substitute or Complement

Cross Elasticity of Demand:

Substitute:

positive cross elasticity

example: the increase in the quantity of pizza demanded when the price of burgers(substitute of pizza) rises

Cross Elasticity of Demand:

Complement:

negative cross elasticity

example: the decrease in the quantity of pizza demanded when the price of a soft drink (complement of pizza) rises.

Income Elasticity of Demand:

Formula for calculating the Income Elasticity of Demand:

Percentage Change in Quantity demanded

Percentage change in Income

Income Elasticity of Demand:

elasticities:

• if the income elasticity of demand is greater than 1, demand is income elastic, the good is a normal good
• if the income elasticity of demand is greater than 0 but less than 1, demand is income inelastic, the good is a normal good
• if the income elasticity of demand is less than 0 (-), the good is an inferior good

Elasticity of Supply:

definition:

Elasticity of Supply:

The supply curve is Perfectly Inelastic if:

the supply curve is vertical

the elasticity of supply=0

Elasticity of Supply:

Supply is Unit Elastic if:

the supply curve is linear and passes through the orgin. (slope=irrevelant)

elasticity of supply=1

Elasticity of Supply:

Supply is Perfectly Elastic if:

the supply curve is horizontal

the elasticity of supply=∞ (infinite)

Elasticity of Supply:

Factors that influence the Elasticity of Supply:

• resource substitution possibilities
• time frame for supply decision

Elasticity of Supply:

Resource Substitution Possibilities:

Elasticity of Supply:

Time frame for Supply Decision:

the more time that passes after a price changes, the greater is the elasticity of supply

• momentary supply
• short-run supply
• long-term supply

Elasticity of Supply:

Momentary Supply:

• is perfectly inelastic
• the quantity supplied immediately following a price change is constant

Elasticity of Supply:

Short-term Supply:

Elasticity of Supply:

Long-Run Supply:

a unitless measure of the responsiveness of a relationship to a change in a variable

calculated: %Δ in dependent variable (ex:price) that results from a 1%Δ in independent variable (ex:quantity)

100 x (point 2 - point 1)

a value that measures the degree of elasticity

[also gives relative magnatute]