Chapter 5 Flashcards
NOT DONE
elasticity
allows us to analyse supply and demand with greater precision
- a measure of how much buyers and sellers respond to changes in market conditions
price elasticity of demand
- measure of how much the quantity demanded of a good responds to a change in the price of that good
- the percentage change in quantity demanded
determinants
- availability of close substitutes
- necessities versus luxuries (necessities are inelastic, luxuries are elastic)
- definition of the market (broad versus narrow categories)
- time horizon
Price elasticity of demand =
% change in quantity demanded / % change in price
mid point method
price elasticity of demand:
Q2-Q1) / [(Q2+Q1)/2) / (P2-P1) / [(P2+P1)/2
price inelastic demand
quantity demanded does not respond strongly to price changes
price elasticity of demand is less than one
price elastic demand
quantity demanded responds strongly to price changes
price elasticity of demand is greater than one
perfectly price inelastic
quantity demanded does not respond to price changes
perfectly price elastic
quantity demanded changes infinitely with any change in price
unit price elastic
quantity demanded changes by the same percentage as the price
total revenue
the amount paid by buyers and received by sellers of a godd
toral revenue formula and notes.. (3)
Total Revenue = P x Q
- demand is inelastic, price and total expenditure move in the same direction
- demand is elastic, price and total expenditure move in opposite directions
- demand is unit elastic, total expenditure remains constant when the price changes
income elasticity of demand
measure of how much the quantity demanded of a good responds to a change in consumers income
= percentage change in quantity demanded / percentage change in income
price elasticity of supply
measure of how much the quantity supplied of a good responds to a change in the price of the good
= percentage change in quantity supplied/percentage change in price
