Ch 6 Part 1 Flashcards
2 groups in market
Consumers and seller
What measure shows consumer’s sensitivity concerning price change?
Price elasticity of demand
If consumers are less sensitive to price changes then……….
Sellers are likely to increase price
Price elasticity of demand
Ratio of the percentage change in the quantity demanded to the percentage change in its own price
Price elasticity of demand (Ed) =
% ΔQuantity demanded / % ΔPrice
What 2 portions is the demand curve divided into?
Elastic and inelastic
What’s Ed = 0
No change in quantity demanded with respect to its price change
What’s Ed = infinity
Such a large change in quantity demanded with such a small change in price
Factors determining the price elasticity of demand
The availability of close substitutes,
Whether good is a necessity or luxury,
Share of income spent on the good,
Time elapsed since price change
Total revenue using elasticity
Total value of sales of a good or service
TR = Q x P
When demand is elastic……
The quantity effect > the price effect
When demand is inelastic……..
The price effect > the quantity effect
Why does demand curve shifts?
Changes in the prices of related goods and changes in consumers income
Cross price elasticity of demand (Exy)
% Δ qty of Good X demanded / % Δ price or Good Y
If goods A & B are substitutes, the cross-price will be?
Pa increases, thus demand for Good B increases (Eva > 0)
