# Welcome back

## Find a book, put up your feet, stay awhile

Sign in with Facebook

Sorry, we are unable to log you in via Facebook at this time. Please try again later.

or

Welcome to Scribd, the world's digital library. Read, publish, and share books and documents. See more

Download

Standard view

Full view

of .

Look up keyword

Like this

Share on social networks

1Activity

×

0 of .

Results for: No results containing your search query

P. 1

Bryan BecherRatings: (0)|Views: 4|Likes: 0

Published by khase

See more

See less

https://www.scribd.com/doc/27369809/Bryan-Becher

02/24/2010

text

original

Bryan Becher2/3/10EC 111

Chapter 5: Elasticity of Demand and Supply

- In a market economy, prices tell producers and consumers about the relative scarcity of products and resources- A firm’s success or failure often depends on how much it knows about the demand for its product- The

price elasticity of demand

measures, in a standardized way, how responsive consumersare to a change in price- Measures the percentage change in quantity demanded divided by the percentagechange in price- = Percentage change in quantity demanded / Percentage change in price-

Price elasticity formula

– Percentage change in quantity demanded divided by the percentagechange in price; the average quantity and the average price are used as bases for computing percentage changes in quantity and in price- E

D

= (Δq / ((q + q

1

) / 2)) / (Δp / ((p + p

1

) / 2))- Elasticity expresses a relationship between two amounts: the percentage change in quantitydemanded and the percentage change in price- In the elasticity formula, the numerator and the denominator have opposite signs, leaving the price elasticity of demand with a negative sign-

Inelastic demand

– A change in price has relatively little effect on quantity demanded; the percentage change in quantity demanded is less than the percentage change in price; the resulting price elasticity has an absolute value less than 1.0-

Unit-elastic demand

– The percentage change in quantity demanded equals the percentagechange in price; the resulting price elasticity has an absolute value of 1.0-

Elastic demand

– A change in price has a relatively large effect on quantity demanded; the percentage change in quantity demanded exceeds the percentage change in price; the resulting price elasticity has an absolute value exceeding 1.0- Knowledge of price elasticity of demand is especially valuable to producers- Indicates the effect of a price change on total revenue-

Total revenue (TR)

– Price multiplied by the quantity demanded at that price- TR = p x q- If the positive effect of a greater quantity demanded more than offsets the negativeeffect of a lower price, then total revenue rises- If demand is elastic, the percentage increase in quantity demanded exceeds the percentage decrease in price, so total revenue increases- If demand is unit elastic, the percentage increase in quantity demanded just equals the percentage decrease in price, so total revenue remains unchanged- If demand is inelastic, the percentage increase in quantity demanded is more than offset by the percentage decrease in price, so total revenue decrease-

Linear demand curve

– A straight-line demand curve; such a demand curve has a constantslope but usually has a varying price elasticity- A given decrease in price always causes the same unit increase in quantity demanded- If the demand curve is linear, consumers are more responsive to a given price change when theinitial price is high than when it’s low- Demand becomes less elastic as one moves down the curve- A point halfway down the linear demand curve divides a linear demand curve into an elasticupper half and an inelastic lower half

Bryan Becher2/3/10EC 111- A price decline increases total revenue if demand is elastic, has no effect on total revenue if demand is unit elastic, and decreases total revenue if demand is inelastic- The slope of a demand curve is not the same as the price elasticity of demand-

Perfectly elastic demand curve

– A horizontal line reflecting a situation in which any priceincrease would reduce quantity demanded to zero; the elasticity has an absolute value of infinity-

Perfectly inelastic demand curve

– A vertical line reflecting a situation in which any pricechange has no effect on the quantity demanded; the elasticity value is zero-

Unit-elastic demand curve

– Everywhere along the demand curve, the percentage change in price causes an equal but offsetting percentage change in quantity demanded, so total revenueremains the same; the elasticity has an absolute value of 1.0-

Constant-elasticity demand curve

– The type of demand that exists when price elasticity isthe same everywhere along the curve; the elasticity value is unchanged- The greater the availability of substitutes and the more similar these substitutes are to the goodin question, the greater that good’s price elasticity of demand- The more narrow the definition, the more substitutes, and, thus, the more elastic the demand- The more important the item is as a share of the consumer’s budget, other things constant thegreater is the income effect of a change in price, so the more price elastic is the demand for theitem- The longer the period of adjustment, the more responsive the change in quantity demanded is toa given change in price- When estimating price elasticity, economists often distinguish between a period during whichconsumers have little time to adjust, the short run, and a period during which consumers canmore fully adjust to a price change, the long run- The price elasticity of demand is greater in the long run because consumers have more time toadjust-

Price elasticity of supply

– A measure of the responsiveness of quantity supplied to a pricechange; the percentage change in quantity supplied divided by the percentage change in price- The percentage change in price and the percentage change in quantity supplied move inthe same direction, so the price elasticity of supply is usually a positive number - E

S

= (Δq / ((q + q

1

) / 2)) / (Δp / ((p + p

1

) / 2))-

Inelastic supply

– A change in price has relatively little effect on quantity supplied; the percentage change in quantity supplied is less than the percentage change in price; the priceelasticity of supply has a value less than 1.0-

Unit-elastic supply

– The percentage change in quantity supplied equals the percentage changein price; the price elasticity of supply equals 1.0-

Elastic supply

– A change in price has a relatively large effect on quantity supplied; the percentage change in quantity supplied exceeds the percentage change in price; the priceelasticity of supply exceeds 1.0- Constant-elasticity supply curves – Supply curves whose elasticity does not change along thecurves-

Perfectly elastic supply curve

– A horizontal line reflecting a situation in which any pricedecrease drops the quantity supplied to zero; the elasticity value is infinity-

Perfectly inelastic supply curve

– A vertical line reflecting a situation in which a price changehas no effect on the quantity supplied; the elasticity value is zero-

Unit-elastic supply curve

– A percentage change in price causes an identical percentagechange in quantity supplied; depicted by a supply curve that is a straight line from the origin; theelasticity value equals 1.0- The elasticity of supply indicates how responsive producers are to a change in price

- Read and print without ads
- Download to keep your version
- Edit, email or read offline

© Copyright 2015 Scribd Inc.

Language:

Choose the language in which you want to experience Scribd:

Sign in with Facebook

Sorry, we are unable to log you in via Facebook at this time. Please try again later.

or

Password Reset Email Sent

Join with Facebook

Sorry, we are unable to log you in via Facebook at this time. Please try again later.

or

By joining, you agree to our

read free for one month

Personalized recommendationsbased on books you love

Syncing across all your devices

Join with Facebook

or Join with EmailSorry, we are unable to log you in via Facebook at this time. Please try again later.

Already a member? Sign in.

By joining, you agree to our

to download

Personalized recommendationsbased on books you love

Syncing across all your devices

Continue with Facebook

Sign inJoin with emailSorry, we are unable to log you in via Facebook at this time. Please try again later.

By joining, you agree to our

Are you sure?

This action might not be possible to undo. Are you sure you want to continue?

CANCEL

OK

You've been reading!

NO, THANKS

OK

scribd