Study Session 4-13

Front 1

define Price Elasticity of Demand.
Show equation

Back 1

a units-free measuer of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buyers' plans remain the same.

Elasticity = Percent change in quantity demanded/Percent change in price

Front 2

Define 3 demand curves of elasticities.

Examples of Elastic and Inelastic Demand.

Back 2

1. Perfectly Inelastic Demand - quantity demanded remains constant when the price changes, then the price elasticity of demand is zero and inelastic.

2. Unit Elastic Demand - percent change in the quantity demanded equals the percent change in price, price elasticity equals 1 and is elastic.

3. Perfectly Elastic Demand - quantity demanded changes by an infinitely large percentage in response to a tiny price change, then the price elasticity of demand is infinity and elastic. (Ex. 2 soft drink machines side-by-side)

Elastic Ex: automobiles, furniture
Inelastic Ex: food, housing

Front 3

How does Elasticity change along a straight-line demand curve?

Back 3

at the mid-point of the curve, demand is unit elastic. Above the mid-point demand is elastic, below the mid-point demand in inelastic.

Front 4

How would a 1 percent price cut affect Total Revenue in each elastic demand environment?

Back 4

elastic: inc. quantity sold by more than 1%, total rev. inc.
inelastic: inc. quantity sold by less than 1%, total rev. dec.
unit elastic: inc. quantity sold by 1%, totoal rev unchanged.

Front 5

Total Revenue Test

Back 5

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

price cut inc total rev - elastic
price cut dec total rev - inelastic
price cut leaves total rev unchanged - unit elastic

Front 6

Magnitude of Elasticity depends on:

Back 6

The closeness of substitutes

The proportion of income spent on the good

The time elapsed since a price change

Front 7

Cross Elasticity of Demand

Back 7

measure of the responsiveness of the demand for a good to a change

Cross elasticity of demand = Percent change in quantity demanded/percent change in price of a substitute or complement.

Positive if substitutes, Negative if Complements

Front 8

Income Elasticity of Demand

Define, equation, and range

Back 8

A measure of the responsiveness of the demand for a good or service to a change in income, other things remaining the same.

Income Elasticity of Demand = % change in quantity demanded / % change in Income

Can be positive or negative and falls into 3 ranges?
-greater than 1: normal good, income elastic
-positive, less than 1: normal good, income inelastic
-negative: inferior good

Front 9

Elasticity of Supply

Back 9

measures the responsiveness of the quantity supplied to a change in the price of a good when all other influences on selling plans remain the same.

Elasticity of Supply - % change in quantity supplied / % change in price

Front 10

3 types of Elasticity of Supply

Back 10

Perfectly Inelastic Supply - (slope = 0) quantity supplied is fixed regardless of price

Unit Elastic Supply - % change in price equals % change in quantity (needs to be linear line and pass through origin)

Perfectly Elastic Supply - a price at which sellers will offer any quantity for sale, curve is horizontal and supply in infinite.

Front 11

Factors that influence Elasticity of Supply

Back 11

1. Resources substitution possibilities
-Zero elasticity for rare items with no substitutes; items with many substitutes have a very high elasticity and nearly horizontal supplies.

2. Time frame for the supply decision
-3 types used to influence the length of time elapsed since a price change.
-Momentary supply: response to supply after price change
Long-run supply: response to supply after price change and all technology has been used
Short-run supply: response to supply after price change when some technologically possible adjustments to production have been made.