What does the law of demand tell us?
consumers will buy more of a product when its price declines and less of it when its price increases
Definition of price elasticity of demand
the responsiveness of the quantity of a product demanded by consumers when the product's price changes
A product is relatively elastic/ elastic when...
modest price changes cause a very large change in the quantity purchased
Demand is elastic if..
A percentage change in price causes a larger percentage change in quantity demanded
E > 1
Demand is inelastic if..
A percentage change in price cause a smaller percentage change in quantity demanded
E < 1
Unit elasticity occurs when...
A percentage change in price causes the same percentage change in demand
E = 1
Perfectly inelastic occurs when...
A price change causes absolutely no change in quantity demanded
E = 0
Graphs as a line that is perpendicular to the x axis
It has 0 quantity stretch
Perfectly elastic occurs when...
A small price change causes consumers to switch from buying none of a product to all that they can obtain
E = infinite
Graphs as a line that is parallel to the x axis
It has infinite quantity stretch
What is total revenue?
the total amount the seller receives from the sale of a product in a particular time period
TR = Product Price * Quantity demanded sold
How does total revenue relate to elasticity and inelasticity?
If price change causes the total revenue to change in the same direction of price, demand is inelastic
If price change causes the total revenue to change in the opposite direction of price, demand is elastic
If TR does not change when price changes, demand is unit- elastic
Determinants of price elasticity of demand
substitutability, proportion of income, luxuries v. necessities, time
Supply is elastic if...
The quantity of a product produced by suppliers is relatively responsive to price changes
What does the degree of price elasticity depend on?
How easily and quickly producers can shift resources between alternative uses to alter production of a good.
The easier and more rapid the transfers of resources, the _____ is the price elasticity of supply
What is market period?
The period that occurs when the time immediately after a change in market price is too short for producers to respond with a change in the amount they supply
What is short run?
a period of time too short to change plant capacity but long enough to use the fixed-size plant more or less intensively
What is the long run?
A time period long enough for firms to adjust their plant sizes and for new firms to enter/ leave the industry.
What is income elasticity of demand?
It measures the degree to which the quantity of a product demanded responds, positively or negatively, to a change in consumers incomes.
What is a normal/ superior good?
The income-elasticity coefficient is positive so more of them are demanded as income rises
What is an inferior good?
It has a negative income- elasticity coefficient. Less of them are demanded as income rises.
What is cross- elasticity of demand?
it measures how the quantity of a product demanded responds to a change in the price of some other product
An increase in the price of one increases demand for the other. Cross- elasticity of demand is positive.
Cross- elasticity is negative. An increase in the price of one decreases the demand for the other.