Chapter 4 Flashcards
price elasticity of demand measures the sensitivity in the quantity demanded in response to
change in a good’s own price (a movement up or down along a stationary demand curve)
How sensitive customers are to price changes
elasticity= sensitivity
elastic= sensitive
inelastic= insensitive
That the value of price elasticity of demand is the percent change in quantity demanded for each
1 % change in the price of the good
Eqxpx= change in qx/change in px
change/reference point * 100
new-old/old * 100
that elasticity along a demand line is computed
1/slope * (P/Q) or (change in Q/ change in
P) * (P/Q)
That price elasticity of demand is presented in absolute numbers, where values greater than 1 are
referred to as elastic (found at higher prices); values smaller than 1 are referred to as inelastic
(found at lower prices); and the value 1 is know as unit elastic (found at the midpoint of a
demand curve that is a straight line
elastic: values > 1
inelastic: values <1
unit elastic: values =1 (midpoint)
Total Revenue (TR)
Price * Quantity = dollar value of sales = is the benefit (only) of
selling something (before cost)
if one should raise, lower, or keep the same prices to maximize total revenue with elastic, unit
elastic and inelastic values respectively
elastic: lower prices
unit elastic: keep price
inelastic: raise prices
Three determinates of price elasticity: number of substitutes, portion of income involved, and the
time available to make a purchase decision
- # of substitutes: more subs = more elastic/sensitive
- portion of income: more of your income = more elastic/sensitive
- Time available: more time = more elastic/sensitive
Steep slope (vertical line)
inelastic
slope = infiity
1/infinity = 0
flat slope (horizontal line)
elastic
slope=0
1/0 = infinity
income elasticity is the percent change in quantity demanded for each 1 % change in the
INCOME of buyers
EqxꞮ= % change Qx / % change Ɪ
Normal goods: Ɪ increases, D shifts right
Ɪ decreases, d shifts left (positive relationship)
Inferior goods: Ɪ increases, D shifts left
Ɪ decreases, D shifts right (negative relationship)
Cross-Price elasticity is the percent change in quantity demanded for GOOD X for each 1
% change in the price of GOOD Y. So we are comparing across prices or products
Eqxpy= % change Qx / % change Py
Substitutes: Py increases, Qx increases Py decreases, Qx decreases (positive relationship)
Complements: Py increases, Qx decreases Py decreases, Qx increases (negative relationship)
positive value for cross-price elasticity reflects (the sign matters for cross-price elasticity)
substitute goods
negative value for cross-price elasticity reflects (the sign matters for cross-price elasticity)
complement goods
- Income and cross-price elasticity values indicate the magnitude of a shift left or right of a:
- While the sign indicates :
- demand curve
- the direction of the shift.
