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Elasticity; microeconomics
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Terms in this set (28)
Elasticity
measures the strength of the buyers response to a change in a variable
The price elasticity of demand
percent change in Quanity demanded of good x/ percent change in price of good x
Price elasticity of demand, greater than 1
elastic
price elasticity of demand, less than 1
inelastic
price elasticity of demand, equal to 1
unit elastic
Income elasticity of demand
percent change in quanity demanded of good x/
percent change in income of good x
Income elasticity greater than 0 (positive value)
normal good
income elasticity less than 0 (negative value)
inferior good
Cross-price elasticity of demand
percent change in quanity demanded of good x/
percent change in price of good w
cross-price elasticity greater than 0 (positive value)
x and w are substitute goods
cross-price elasticity = to 0
x and w are unrelated goods
cross-price elasticity less than 0 (negative value)
x and w are complementary goods
The price elasticity of supply
percent change in quanity supply of good x/
percent change in price of good x
elasticity of supply greater than 1
elastic supply
elasticity of supply equal to 1
unit elastic
elasticity of supply less than 1
inelastic
Determinants of price elasticity of demand
1. substitute goods
2. income
3. necessity, luxuray, or durability of good
4. Time
Substitute goods
more substitute goods the more elasticity
Income
goods that command a larger portion of a consumers income are more elastic
Necessity goods
inelastic
Luxuary goods
elastic
durable goods
last a long time, results in post poning purchase-> elastic
Time
more time equals more elasticity
Total Revenue
the income a firm receives from selling its goods or services,
Total Revenue equation
price * quanity demanded
Price and total revenue move in opp. directions
elastic
price and total revenue move in same directions
inelastic
total revenue is unaffected by change in price
unit elastic
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