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12 Cards in this Set
- Front
- Back
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Price Elasticity of Demand
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The ratio of the percent change in the quantity demanded to the percent change in the price as we move along the demand curve.
Always negative due to the law of demand. Not Constant. |
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Elastic VS Inelastic
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Elastic = l PED l > 1 (Price sensitive)
Inelastic = l PED l < 1 (Price In-sensitive) Unit-Elastic = l PED l = 1 As you move down DC points go from being elastic > unit elastic > inelastic |
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Determinants of Elasticity
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1. Close Substitutes
2. Necessity VS Luxury 3. % of Income spent on Good 4. Time 5. Category |
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Perfectly Inelastic
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When the quantity demanded does not respond at all to the price.
Demand curve is a vertical line. |
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Perfectly Elastic
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When any price increase will cause the quantity demanded to drop to zero.
Demand curve is a horizontal line |
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Midpoint Method
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Calculates the percent change. We calculate changes in a variable compared with the average, or midpoint of the starting and final values.
Measures elasticity between 2 points on DC |
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Total Revenue
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Total Revenue is Maximized where lPEDl=1
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Price Effect
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After a price increase, each unit sold sells at a higher price, which tends to raise revenue
INELASTIC GOOD |
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Sales Effect
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After a price increase, fewer units are sold, which tends to lower revenue
ELASTIC GOOD |
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Cross-Price Elasticity of Demand
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Between two goods, measures the effect of the change in one good's price on the quantity demanded of the other good.
If answer > 0 then X & Y are substitutes If answer < 0 then X &Y are compliments |
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Income Elasticity of Demand
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The percent change in the quantity of a good demanded when a consumer's income changes divided by the percent change in the consumers income.
IED is + then the good is normal IED is - then the good is inferior |
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Price Elasticity of Supply
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Measure of the responsiveness of the quantity of a good supplied to the price of that good.
Always positive. PES = 0, the perfectly inelastic supply PES = Infinity, the perfectly elastic supply |
