Econ 101 Chapter 6 Elasticity - Custom Scholars
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# Econ 101 Chapter 6 Elasticity

question
price elasticity of demand
-Measures how much the quantity demanded responds to a change in price.
-Formula: % change P / %change Qd
question
sign of price elasticity of demand
A negative value as P and Qd move in opposite directions along a demand curve. Shown as an absolute value.
question
Calculating Percent Change
Midpoint method:
[(end value-start value)/midpoint] X100
question
Determinants of Price Elastcity
-extent to which close substitutes are available
-whether good is a necessity or luxury
-how broadly or narrowly the good is defined (eg. specific store vs. all clothes)
-share of income spent on good (eg. \$1--> \$2 = inelastic)
-time horizon
question
demand curves
-slope of demand curve and price elasticity of demand are closely related
-steeper the curve the less elastic
question
5 type of demand curves
1) perfectly inelastic demand (vertical line, no price sensitivity, =0)
2) Inelastic demand (steep curve, low price sensitivity, =<1)
3) Unit elastic demand (intermediate slope & price sensitivity, =1)
4) Elastic demand (relatively flat curve, high price sensitivity, = >1)
5) Perfectly elastic demand (horizontal slope, extreme price sensitivity, =infinity)
question
Elasticity of a Linear Demand Curve
-The slope of a linear demand curve is constant, but its elasticity is not.
-Generally, on a downwards facing slope the top is elastic (>1) and bottom is inelastic (<1)
question
price elasticity and total revenue
revenue= PxQ
Higher price means more revenue/unit sold
However, less units will be sold
question
Signs and price elasticity of demand
Elastic demand = price elasticity of demand is >1
question
What happens if demand is elastic?
-Output wil outweigh input
-elasticity of demand is >1
-increase prices means decrease in revenue
question
What happens if demand is inelastic?
Input will outweigh output
elasticity of demand <1
increase prices means increase in revenue
question
cross-price elasticity of demand
-measures how much the Qd of one good responds to a change in the price of another good
-%change in Qd of good 1/ %change in price of good 2
question
Signs of Cross Price Elasticity
(+)= 2 goods are substitutes
(-)=2 goods are compliments
question
Income Elacticity of Demand
-measure how a 1% increase in income will affect quantity demanded for a product
-%change in Qd/%change in income
question
Signs of income elasticity demand
(+)= normal good
(-)= inferior good
question
price elasticity of supply
%change in Qd / %change in price
1 of 16
question
price elasticity of demand
-Measures how much the quantity demanded responds to a change in price.
-Formula: % change P / %change Qd
question
sign of price elasticity of demand
A negative value as P and Qd move in opposite directions along a demand curve. Shown as an absolute value.
question
Calculating Percent Change
Midpoint method:
[(end value-start value)/midpoint] X100
question
Determinants of Price Elastcity
-extent to which close substitutes are available
-whether good is a necessity or luxury
-how broadly or narrowly the good is defined (eg. specific store vs. all clothes)
-share of income spent on good (eg. \$1--> \$2 = inelastic)
-time horizon
question
demand curves
-slope of demand curve and price elasticity of demand are closely related
-steeper the curve the less elastic
question
5 type of demand curves
1) perfectly inelastic demand (vertical line, no price sensitivity, =0)
2) Inelastic demand (steep curve, low price sensitivity, =<1)
3) Unit elastic demand (intermediate slope & price sensitivity, =1)
4) Elastic demand (relatively flat curve, high price sensitivity, = >1)
5) Perfectly elastic demand (horizontal slope, extreme price sensitivity, =infinity)
question
Elasticity of a Linear Demand Curve
-The slope of a linear demand curve is constant, but its elasticity is not.
-Generally, on a downwards facing slope the top is elastic (>1) and bottom is inelastic (<1)
question
price elasticity and total revenue
revenue= PxQ
Higher price means more revenue/unit sold
However, less units will be sold
question
Signs and price elasticity of demand
Elastic demand = price elasticity of demand is >1
question
What happens if demand is elastic?
-Output wil outweigh input
-elasticity of demand is >1
-increase prices means decrease in revenue
question
What happens if demand is inelastic?
Input will outweigh output
elasticity of demand <1
increase prices means increase in revenue
question
cross-price elasticity of demand
-measures how much the Qd of one good responds to a change in the price of another good
-%change in Qd of good 1/ %change in price of good 2
question
Signs of Cross Price Elasticity
(+)= 2 goods are substitutes
(-)=2 goods are compliments
question
Income Elacticity of Demand
-measure how a 1% increase in income will affect quantity demanded for a product
-%change in Qd/%change in income
question
Signs of income elasticity demand
(+)= normal good
(-)= inferior good
question
price elasticity of supply
%change in Qd / %change in price

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