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  • What are elasticities?

    Measures of the sensitivity of one variable to another.

    What is ht price elasticity of demand?

    It measures the sensitivity of quantity demanded to the price of the good itself. The percentage change in quantity demanded divided by the percentage change in price.

    Look up price elasticity of demand equation

    Page 121

    Look up example of price elasticity of demand problem

    Page 122

    The _______ the elasticity value, the more sensitive quantity demanded is to price.

    greater

    When we calculate price elasticity of demand, we image that only _______ is changing, while we hold constant all other influences on quantity demanded, such as buyers incomes, the prices of other goods, and so on.

    price

    We measure elasticity for a _________ an unchanging demand curve.

    Movement along

    When determining elasticities, we calculate the percentage change in a variable using the midpoint formula: the change in the variable divided by the average of the old and new values.

    Yes.

    The ________ formula is an approximation to the actual percentage change in a variable.

    Midpoint

    We will use the midpoint formula when calculating ____________.

    Elasticity values from data on prices and quantities

    What is inelastic demand?

    Elasticity of demand between 0 and 1.

    What us elastic demand?

    A price elasticity of demand greater than 1.

    What is unit elastic demand?

    A price elasticity of demand equal to 1.

    What is perfectly inelastic demand?

    A price elasticity of demand equal to 0.

    What is perfectly (infinitely) elastic demand?

    A price elasticity of demand approaching infinity.

    What does elastic mean?

    That quantity demanded is relatively sensitive to price changes.

    What does inelastic mean?

    The quantity demanded is relatively insensitive to price changes.

    Elasticity is the ratio of __________ changes; what remains constant along a linear demand curve is the rail of absolute or unit changes.

    Percentage

    Elasticity of demand varies along a __________ sloping straight-line demand curve. More specifically, demand becomes less elastic as we move downward (ED gets smaller).

    Downward

    _________ demand curve slope downward.

    Linear

    __________ demand curves, moving down the curve can cause elasticity to rise, fall, or remain constant, depending on the shape of the curve.

    Nonlinear

    On the one hand, each unit sold can be sold for more, tending to increase revenue. On the other hand, fewer units will be sold, which works to decrease revenue. Which one will dominate?

    THe answer depends on the price elasticity of demand for the good. Note that the total revenue of sellers in a market (TR) is the price per unit ℗ times the quantity that people buy. TR= P x Q. When we raise price, p goes up, but q goes down. What happens to the product depends on which one changes by a larger percentage.

    A raise in price causes total revenue to increase, so the good is _______.

    Inelastic

    An increase in price raises total revenue when demand is ________, and shrinks total revenue when demand is ________.

    Inelastic, elastic

    At any point on a demand curve, sellers' total revenue is the area of a rectangle with height equal to price and width equal to quantity demanded.

    Wow, good point.

    When close substitutes are available for a good, demand for it will be more elastic.

    Yep.

    Demand for a necessity is _____.

    Less elastic

    Luxuries are more/less elastic.

    More elastic

    When spending on a good makes up a larger proportion of families' budgets, demand tends to be more elastic.

    YEP.

    What is the short run elasticity of demand?

    An elasticity measured just a short time after a price change.

    What is the long-run elasticity?

    An elasticity measured a year or more after price change.

    For many goods, demand will be more elastic in the ______ run than the _____ run.

    Long, short

    In markets where it takes a long time for buyers to fully adjust to a price change, demand will be more elastic in the long run than in the short run.

    Good point.

    How can we et two different elasticity measures from the same market?

    There can be more than one demand curve associated with the market.

    What is the short run demand curve?

    Shows the quantity demanded at different prices when people only have a short period of time ( a few weeks or a few months) to adjust.

    What is a long run demand curve?

    Shows quantity demanded after buyers have had much longer to adjust to a price change-- a year or more.

    What is the price elasticity of supply?

    The percentage change in quantity supplied caused by a 1% change in price. Percent change in price of quantity suppled divided by percent change in price.

    Because price and quantity supplied move in the same direction, the result is a positive number.

    YEP

    The price elasticity of supply measures the sensitivity of quantity supplied to price changes as we move _____ the demand curve.

    Along

    Supply will tend to be more ____ when suppliers can switch to producing alternative goods more easily.

    Elastic

    The narrowness of the market definition matters too-- especially geographic narrowness.

    Yep.

    Time horizon is important.

    The longer we wait after a price change, the greater the supply response to a price change.

    Quantity is more sensitive to price in the long run, because.....

    because farmers have the time to make further adjustments to increase production, such as shifting from other crops to corn.

    In general, long-run supply elasticities are _______ than short-run supply elasticities.

    greater

    What do elasticities have in common?

    They tell us the percentage change in one variable caused by a 1% change in the other.

    The ______ tells us how sensitive quantity demanded is to changes in buyers incomes.

    Income elasticity of demand

    How is income elasticity of demand calculated?

    Percent change in qunaity demanded over the percent change in income

    Keep in mind that while price elasticity measures the sensitivity of demand to price as we _________ the demand curve form one point to another, an ncome elasticity tells us the relative shift of the demand curve- the percentage increase in quantity demanded at a given price.

    move along

    _____ is positive for normal goods, but negative for inferior goods.

    Income elasticity

    What is the cross-price elasticity of demand?

    The percentage change in the quantity demanded of one good caused by a 1% percent change in the price of another good.

    With a ______ (as with an income elasticity) the sign matters. A positive cross price elasticity means that the two goods are substitutes: A rise in the price of one good increases demand for the other good.

    Cross price elasticity

    A negative cross price elasticity means that the goods are _________: A rise in the price of one good decreases the demand for the other.

    Compliment

    In general, price elasticity of demand varies along a demand varies along a demand curve.

    In a special case of a straight-line demand curve, demand becomes more and more elastic as we move upward and leftward along the curve.

    Generally speaking demand for a good tends to be more elastic...

    1. the less we regard the good as a necessity, 2. the easier it is to find substutitues for the good 3. the greater the share of householders' budget that is spent on the good, and 4. the more time we allow for quantity demanded to respond to the price change.

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