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the price elasticity of demand measures how much |
quantity demaned responds to a change in price |
|
demand is said to be price elastic if |
buyers respond substantially to changes in the price of a good |
|
demand is said to be inelastic if |
the quantity demanded changes inly slightly when the price of the good changes |
|
demand is elastic if the price elasticity of demand is |
greater than 1 |
|
demand is inelastic if the price elasticity of demand is |
less than 1 |
|
goods with many close substitutes tend to have |
more elastic demands |
|
for a good that is a luxury demand tends |
to be elastic |
|
for a good that is a necessity demand tends |
to be Inelastic |
|
a good will have more inelastic demand the |
broader the definition of the market |
|
economists compute the price elasticity of demand as the |
percentage change in quanitity demanded divided by the percentage 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 |
20 percent decrease in quanityty demanded |
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when demand is perfectly inelastic the demand curve will be |
vertical bc buyers purchase the same amount as before whenever the price falls or rises |
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demand is said to have unit elasticity if the price elasticity od demand is |
equal to 1 |
|
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 |
|
incomse elasticity of demand measures how |
the quantity demanded changes as consumer income changes |
|
if an increase in income results in a decrease in quantity demanded of a goos then for that good the |
income elasticity of demand is negative |
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assume that a 4% increase in income results in a 2% increase in quantity remaded of a good. income elasticity of demand for the good is |
positive, and the good is a normal good |
|
cross price elasticity of demand measures how |
the quantity demanded of one good changes in response to a change in price of another good |
|
if 2 goods are substitutes their cross price elasticity will bw |
positive |
|
if 2 goods are complements their cross price elasticity will be |
negative |
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if the quantity supplies responds only slightly to changes in price then |
supply is said to be inelastic |
|
Key determinant of the price elasticity of supply is the |
time horizon |
|
if the quantity supplies is the same regardless of price then supply is |
perfectly inelastic |
|
suppose that corn farmers want to increase their total revenue knowing that the demand for corn is inelastic corn farmers should |
reduce the number of acres on which they plant corn |
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