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1

define elasticity

Elasticity = A measure of responsiveness of quantity demanded or quantity supplied to one of it’s determinates

2

Define price elasticity of demand

Price elasticity of demand = A measure of how much the quantity demanded of a good responds to a change in the price of that good, calculated as a percentage


Price elasticity of demand = % change in quantity demanded / %change in price

3

price elasticity of demand formala

Price elasticity of demand = % change in quantity demanded / %change in price


The midpoint formula is preferable when calculating the price elasticity of demand because it gives the same answer regardless of the direction of the change.
(Q2 – Q1)/[(Q2 + Q1)/2] Price elasticity of demand = (P2 – P1)/[(P2 + P1)/2]
*page 99*

4

Price elasticty of demand determinants

1. Availability of close substitutes (many goods = elastic)
2. Necessities V luxuries (necessities = inelastic demand, luxury = elastic)
3. Definition of the market – ‘how we draw the boundaries of the market’ board category = inelastic demand, narrow category (many close substitutes) = elastic demand / Wide market = less elastic
4. Time horizon = longer time = more elastic = short term = inelastic

5

Define total revenue

The amount paid by buyers and received by sellers of a good calculated as the price of the good X quantity sold

With an inelastic demand curve, an increase in price leads to a decrease in quantity that is proportionately smaller. Thus, total revenue increases.

TR = P x Q

6

type of demand curves

elastic
inelastic
unit elastic
perfectly elastic
perfectly inelastic

7

Define elastic curves

When the elasticity is greater than 1, therefore quantity moves proportionally more than price (quantity demanded does respond strongly to a change in price)

8

define inelastic demand curve

When elasticity is less than 1 therefore, quantity moves proportionally less than price (Quantity demanded does not respond strongly to a change in price)

9

explain unit elastic demand curve

If elasticity is exactly 1 the percentage change in quantity equals the percentage change in price, this is called Unit elasticity

10

Explain perfectly inelastic demand curve

Perfect inelastic = quantity demanded does not respond to a change in price (demand curve is vertical)

11

Explain perfectly elastic demand curve

Perfectly elastic = occurs when price elasticity of demand approaches infinity and the demand curve becomes horizontal, reflecting the fact that a very small change in price will lead to large changes in quantity demanded

12

Define income elasticity of demand and it's formula

Income elasticity of demand = Measure of how much the quantity demand of a good responds to a change in consumer income, calculated as a percentage change in quantity demanded divided by percentage change of income


%change in quantity demand / %change in income




Types of goods:
Normal goods
Inferior goods
o Higher income raises the quantity demanded for normal goods but lowers the quantity demanded for inferior goods. (look at slide 66 week 3*)

13

Define cross price elasticity of demand

A measure of how much quantity demanded of one good responds to a change in price of another good.
Calculated: %change in quantity of good 1 / % change in price of good 2

14

Define elasticity of supply

A measure of how much the quantity supplied of a good responds to a change in the price of that good.

15

Elasticity of supply formula


Price elasticity of supply = %change in quantity supplied / % change in price

16

Determinates of elasticity of supply

Ability of sellers to change the amount of the good they produce.
– Beach‐front land is inelastic.
– Books, cars, or manufactured goods are elastic.
• Time period – Supply is more elastic in the long run

17

explain income elasticity of demand and goods

Higher income raises quantity demanded, because quantity demanded and income move in the same direction, normal goods have POSITIVE income elasiticites

inferior goods have Negative income elasticities

18

Cross price elasticity of demand formula

%chnage in QUANTITY of good 1 / % change in PRICE of good 2

substitutes will likely be Positive

Complements will be negative (page 104)

19

Look at tax slides and tax revenue

:))