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The price elasticity of demand measures how much |
quantity demanded responds to a change in price |
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Demand is said to be price elastic if |
buyers respond substantially to changes in the price of the good |
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Demand is said to be inelastic if |
the quantity demanded changes only slightly when the price of the good changes |
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Demand is elastic if the price elasticity of demand is |
greater than one |
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Demand is inelastic if the price elasticity of demand is |
less than one |
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Goods with many close substitutes tend to have |
more elastic demands |
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For a good that is a luxury, demand |
tends to be elastic |
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For a good that is a necessity, demand |
tends to be inelastic |
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A good will have a more inelastic demand, the |
broader the definition of the market |
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Economists compute the price elasticity of demand as the |
percentage change in quantity demanded divided by the percent change in price |
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If the price elasticity of demand for a good is 2.0, then a 10 percent increase in price results in a |
20 percent decrease in the quantity demanded |
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When demand is perfectly inelastic, the demand curve will be |
vertical, because buyers purchase the same amount as before whenever the price rises or falls |
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Demand is said to have unit elasticity if the price elasticity of demand is |
equal to one |
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When demand is elastic, a decrease in price will cause |
an increase in total revenue |
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When demand is inelastic, an increase in price will cause |
an increase in total revenue |
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When demand is unit elastic, price elasticity of demand equals |
1, and total revenue does not change when price changes |
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Income elasticity of demand measures how |
the quantity demanded changes as consumer income changes |
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If a increase in income results in a decrease in the quantity demanded of a good, then for that good, the |
income elasticity of demand is negative |
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Assume that a 4 percent increase in income results in a 2 percent increase in the quantity demanded of a good. The income elasticity of a demand for the good is |
positive, and the good is a normal good |
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Cross-price elasticity of demand measures how |
the quantity demanded of one good changes in response to a change in the price of another good |
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If two goods are substitutes, their cross-price elasticity will be |
positive |
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If two goods are complements, their cross-price elasticity will be |
negative |
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If the quantity supplied responds only slightly to changes in price, then |
supply i said to be inelastic |
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A key determinant of the price elasticity of supply is the |
time horizon |
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IF the quantity supplied is the same regardless of price, then supply is |
perfectly inelastic |
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Suppose that corn farmers want to increase their total revenue. Knowing that the demand for corn in inelastic, corn farmers should |
reduce the number of acre on which they plant corn |
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Determinants of the Price Elasticity of Demand |
Availability of close substitutes necessities versus luxuries definiton of the market time horizon |
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The flatter the demand curve that passes through a given point, the |
greater the price elasticity of demand |
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If the demand is inelastic, then an increase in price causes |
an increase in total revenue |
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When demand is inelastic (a price elasticity less than 1) |
price and total revenue move in the same direction |
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When demand is elastic (a price elasticity greater than 1) |
price and total revenue move in opposite directions |
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If demand is unit elastic (a price elasticity exactly equal to 1) |
total revenue remains constant when the price changes |
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At points with a low price and high quantity, |
the demand curve is inelastic |
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