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15 Cards in this Set

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Measure of responsiveness (shows how one variable reacts to changes in another)
Price Elasticity of Demand
measures the responsiveness or sensitivity of quantity demanded from changes in the price of the good
Equation for price elasticity of demand
E= %ΔQ/%ΔP
percentage change in quantity is greater than percentage change in price; When E (elasticity number) is greater than 1.
What does the elasticity number mean?
For every 1% change in price, there will be an E% change in quantity demanded (Q changes by E times % change in price)
Unit elastic
Percent change in Q is equal to percent change in P (E=1)
Factors that influence price elasticity
Necessity vs. luxury, available substitutes, portion of budget spent on good (if you have to buy the item frequently = elastic), Time horizon (goods become more elastic the longer the time period we have to adjust to change in price)
Perfectly inelastic
Vertical demand curve (buying at set quantity of good regardless of price; E=0) Ex) Drugs
Perfectly elastic
Horizontal demand curve (we purchase the good only at a particular price- so sensitive that any change in price = don't buy any). ex) Perfectly competitive firms
Midpoint formula
E= (Δ Q/average Q)/( Δ P/average P); price elasticity will always be (-) due to law of demand, so take absolute value
Demand curve and elasticity
45 degrees line perpendicular to demand curve = E=1; below that point E <1, and above it E >1. X-intercept = E=0; Y-intercept = E=infinity (see notes)
How to use elasticity coefficient
For every 1% increase in price, quantity demanded falls by E(Q) % and vice versa
Relationship between price elasticity and total revenue (PxQ)
Elastic- if P goes down, then TR goes up and vice versa (since Q changes by a lot this will cover the drop in price so the seller earls more because they sell a lot more)
Inelastic- if P goes down then TR goes down and vice versa (since Q only rises by a little, don't sell enough extra units to cover lower price and revenues fall)
Income elasticity of demand
-responsiveness of quantity demanded to chnages in income (just replace P with Income in midpoint formula)
-for every 1% income increase, his quantity consumed falls by E(Q)%
-Ei >0 = normal good; Ei<0 = inferior good
Cross price elasticity of demand
-crosses price of one good to the quantity of another good
-use price of good B and quantity of good A in midpoint formula
-Ecp > 0, goods are substitutes; Ecp < 0, goods are complements