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11 Cards in this Set

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define Price Elasticity of Demand.
Show equation
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
Define 3 demand curves of elasticities.

Examples of Elastic and Inelastic Demand.
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
How does Elasticity change along a straight-line demand curve?
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.
How would a 1 percent price cut affect Total Revenue in each elastic demand environment?
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.
Total Revenue Test
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
Magnitude of Elasticity depends on:
The closeness of substitutes

The proportion of income spent on the good

The time elapsed since a price change
Cross Elasticity of Demand
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
Income Elasticity of Demand

Define, equation, and range
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
Elasticity of Supply
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
3 types of Elasticity of Supply
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.
Factors that influence Elasticity of Supply
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.