Chapter 4 (1) Flashcards
it is accepted that price increases cause the quantity of coffees demanded to fall
► But by how MUCH
►How BIG that movement will be
ELASTICITY
is a measure of how much consumers & producers = respond to a change in market conditions
► can be used to measure responses to a change in the price of a good, change in the price of a related good, or a change in income
►allows economic decision makers to anticipate HOW OTHERS WILL RESPOND to changes in market conditions
► One needs to know how MUCH a change in prices will affect consumers’ willingness to buy
Demand and Supply
► Price elasticity of demand
► Price elasticity of supply
–> these describe how much the quantity demanded & the quantity supplied change –> when the price of a good changes
CROSS-PRICE ELASTICITY OF DEMAND
describes what happens to the quantity demanded of one good –> when the price of another good changes
INCOME ELASTICITY OF DEMAND
measures how much the quantity demanded reacts to changes in consumers’ incomes
PRICE ELASTICITY OF DEMAND
describes the size of the change in the quantity demanded of a good or service when its price changes
-How much demand decreases.
Another way of thinking:
> is a measure of consumers’ sensitivity to price changes
►When consumers’ buying decisions are highly influenced by price –> we say that their demand curve is MORE ELASTIC
○ Meaning that a small change in price causes a large change in the quantity demanded
LESS ELASTIC (demand curve)
when consumers = NOT very sensitive to price changes
► That is, they buy approx. the same quantity regardless of the price
DETERMINANTS OF PRICE ELASTICITY OF DEMAND
consumers = more sensitive to price changes for some goods & services than for others
► Why isn’t price elasticity of demand the same for all goods & services?
DETERMINANTS OF PRICE ELASTICITY OF DEMAND (LIST)
► Availability of substitutes
► Degree of Necessity
► Cost relative to Income
►Adjustment time
► Scope of the Market
AVAILABILITY OF SUBSTITUTES
Ø When the price of a good w/ a close substitute increases –> customers will buy the substitute instead
► If close substitute = available for a particular good –> then the demand for that good = will be MORE ELASTIC (receptive) than it would be if ONLY distant substitutes are available.
DEGREE OF NECESSITY
when a good is a basic necessity –> people will buy it even if prices rise.
► The demand for socks probably is not very elastic –> nor is the demand for home heating during the weather
► Although people may not like it when the prices of these rise –> they will buy them to maintain a basic level of comfort
And when prices fall –> they probably won’t buy vastly more socks or make their homes a lot hotter
► In comparison: demand for luxuries (vacations, expensive cars, and jewellery is likely to MORE elastic
COST RELATIVE TO INCOME
all else held equal: if consumers spend a very small share (so they spend only a little) of their incomes on a good –> their demand for the good = will be LESS elastic
► Example: most people can get a year’s supply of salt for just a few dollars
► Even if the price doubled –> a year’s supply would still cost less than $10 –> so consumers = probably would not bother to adjust their salt consumption
Opposite is true:
- If a good costs a very large proportion of a person’s income –> like going on a luxury.
(read pg. 112)
ADJUSTMENT TIME
goods often have much more elastic demand in the long run than in the short term
► Often adjusting to price changes takes some time
SCOPE OF THE MARKET
a major warning with regard to the determinants just described is that each depends on how you define the market for a good or service
