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https://quizlet.com/_3vob5d

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% change in QD / % change in price

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QD responds significantly to change in price

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QD responds only a small amount to change in price

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Determinants of Price Elasticity of Demand

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Determinants of Price Elasticity of Demand

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1. Availability of Close Substitutes

more substitutes = elastic

less substitutes = inelastic

2. Necessities v. Luxuries

necessities = inelastic

luxuries = elastic

3. Definition of the Market

broad = inelastic

food

narrow = elastic

vanilla ice cream

4. Time Horizon

short run = inelastic

long run = elastic

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- avoid inverses
- same value no matter which direction you calculate from
- find midpoint between points A and B --> AVERAGING

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https://docs.google.com/document/d/1fhZ5JEh4Q4EXiqHgb9DN9QFUYEdYXvcP-CG8lj3rOOk/edit

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elasticity > 1 = elastic
elasticity <1 = inelastic
elasticity = 1 = unit elastic
elasticity = infinity = perfectly elastic
elasticity = 0 = perfectly inelastic

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total revenue = Price x Quantity

TR = P x Q

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Total Revenue and Price Elasticity of Demand

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Total Revenue and Price Elasticity of Demand

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if demand is INELASTIC... an INCREASE in price would result in an INCREASE in total revenue

if demand is ELASTIC... an INCREASE in price would result in a DECREASE in total revenue

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inelastic demand: P and TR move in same direction

elastic demand: P and TR move in opposite directions

unit elastic: TR remains constant when P changes

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Elasticity is related to slope of demand curve

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Elasticity is related to slope of demand curve

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at some places on the curve, the demand may be inelastic, and at others, it may be elastic

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% change in QD / % change in income

normal goods: POSITIVE (+) income elasticity

inferior goods: NEGATIVE (-) income elasticity

necessities: small income elasticity

luxuries: large income elasticity

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normal good if income elasticity > 0

inferior good if income elasticity < 0

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% change QD for good 1 / % change in price of good 2

substitutes: POSITIVE (+) cross price elasticity
complements: NEGATIVE (-) cross price elasticity

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% change in QS / % change in price

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QS responds significantly to change in price

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QS responds only a small amount to change in price

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Determinants of Price Elasticity of Supply

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Determinants of Price Elasticity of Supply

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1. Availability of Inputs

many inputs: large price elasticity of supply

innovation tends to mean more elastic

few inputs: small price elasticity of supply

scarcity tends to mean more inelastic

2. Time Period

short run = inelastic

long run = elastic

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https://docs.google.com/document/d/1fhZ5JEh4Q4EXiqHgb9DN9QFUYEdYXvcP-CG8lj3rOOk/edit

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elasticity > 1 = elastic
elasticity <1 = inelastic
elasticity = 1 = unit elastic
elasticity = infinity = perfectly elastic
elasticity = 0 = perfectly inelastic

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tech advancement affects supply curve
- shift right

if demand curve is inelastic...
...an decrease in price causes total revenue to also decrease

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owners of oil jointly lowered their supply which raised prices

short run = oil was inelastic and owners stay rich

large price increase

long run = oil was elastic and owners couldn't keep the price of oil high

small increase in price

*Take time horizon into consideration!!!

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Price Elasticity of Supply in the LONG RUN

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Price Elasticity of Supply in the LONG RUN

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graph

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Price Elasticity of Supply in the SHORT RUN

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Price Elasticity of Supply in the SHORT RUN

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graph

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increase in agents for war on drugs --> affects supply curve
- shift left

short run = inelastic

increase in drug education --> affects demand curve
- shift left

long run = elastic