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35 Cards in this Set
- Front
- Back
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Price Elasticity of Demand (Ep)
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The responsiveness of quantity demanded of a commodity to changes in its price
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Ep=
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Percentage change in quantity demanded / Percentage change in price
-Queen over Pawn |
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Find Ep:
Price of oil increases 10% Quantity demanded decreases 1% |
-0.1
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How would you interpret an elasticity of –0.1?
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A 10% increase in the price of oil will lead to a 1% decrease in quantity demanded.
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The mid-point, or average, formula
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[change in Q/ (sum of quantities/2)] / [Change in P/(sum of prices/2)]
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Elastic Demand
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Percentage change in quantity demanded is larger than the percentage change in price
Total expenditures and price are inversely related in the elastic region of the demand curve Ep > 1 |
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Unit Elasticity of Demand
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Percentage change in quantity demanded is equal to the percentage change in price
Total expenditures are invariant to price changes in the unit-elastic region of the demand curve Ep = 1 |
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Inelastic Demand
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Percentage change in quantity demanded is smaller than the percentage change in price
Total expenditures and price are directly related in the inelastic region of the demand curve Ep < 1 |
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Elastic demand
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% change in Q > % change in P; Ep > 1
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Unit-elastic
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% change in Q = % change in P; Ep = 1
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Inelastic demand
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% change in Q < % change in P; Ep < 1
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Perfectly Inelastic Demand
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A demand curve that is a vertical line
It has only one quantity demanded for each price. No matter what the price, quantity demanded does not change. A demand that exhibits zero responsiveness to price changes. |
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Perfectly Elastic Demand
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A demand curve that is a horizontal line
It has only one price for every quantity. The slightest increase in price leads to zero quantity demanded. |
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When demand is _______, a negative relationship exists between changes in price and changes in total revenues
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elastic
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When demand is unit-elastic, changes in price _________ total revenues
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do not change
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When demand is ______, a positive relationship exists between changes in price and total revenues
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inelastic
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Elasticity-revenue relationship
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Total revenues are the product of price times units sold.
The law of demand states along a given curve, price is inverse to quantity |
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What happens to the product of price times quantity depends on which of the opposing forces exerts a greater force on total revenues.
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This is what price elasticity of demand is designed to measure: responsiveness of quantity demanded to a change in price.
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The price elasticity of demand for a particular commodity at any price depends on these factors
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Existence of substitutes
Share of the budget The length of time allowed for adjustment |
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Existence of substitutes
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The closer the substitutes and the more substitutes there are, the more elastic is demand.
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Share of the budget
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The greater the share of the consumer’s total budget spent on a good, the greater is the price elasticity
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The length of time allowed for adjustment
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The longer any price change persists, the greater is the elasticity of demand.
Price elasticity is greater in the long run than in the short run. |
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How to define the short run and the long run
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The short run is a time period too short for consumers to fully adjust to a price change.
The long run is a time period long enough for consumers to fully adjust to a change in price, other things constant. |
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Economists have found that estimated elasticities of demand are greater in the....
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long run than in the short run
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Price Elasticity of Supply (Es)
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The responsiveness of the quantity supplied of a commodity to a change in its price
The percentage change in quantity supplied divided by the percentage change in price |
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Formula for computing price elasticity of supply
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Es= percentage change in quantity supplied / percentage change in price
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Perfectly Elastic Supply
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Quantity supplied falls to zero when there is the slightest decrease in price
The supply curve is horizontal at a given price |
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Perfectly Inelastic Supply
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Quantity supplied is constant no matter what happens to price
The supply curve is vertical at a given price |
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Price elasticity of supply and length of time for adjustment
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The longer the time allowed for adjustment, the more resources can flow into (out of) an industry through expansion (contraction) of existing firms.
The longer the time allowed for adjustment, the entry (exit) of firms increases (decreases) production in an industry. |
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Expressing and calculating the price elasticity of demand
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Percentage change in quantity demanded divided by the percentage change in price
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The relationship between the price elasticity of demand and total revenues
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When demand is elastic, price and total revenue are inversely related.
When demand is inelastic, price and total revenue are positively related. When demand is unit-elastic, total revenue does not change when price changes. |
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Factors that determine price elasticity of demand
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Availability of substitutes
Percentage of a person’s budget spent on the good The length of time allowed for adjustment to a price change |
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The cross price elasticity of demand and using it to determine whether two goods are substitutes or complements
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Percentage change in the demand for one good divided by the percentage change in the price of a related good
If cross elasticity is positive, the goods are substitutes. If cross elasticity is negative, the goods are complements. |
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Income elasticity of demand
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Responsiveness of the demand for the good to a change in income
Percentage change in the demand for a good divided by the percentage change in income |
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Classifying supply elasticities and how the length of time for adjustment affects price elasticity of supply
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Elastic supply: price elasticity of supply is greater than 1
Inelastic supply: price elasticity of supply is less than 1 Unit-elastic supply: price elasticity of supply is equal to 1 The longer the time period for adjustment, the more elastic is supply. |
