M Calc, Interp price, income, and cross-price elastcs of D and describe factors that affect each measure Flashcards
Elasticity is measured as the ratio of the percentage change in one variable to a percentage change in another. Three elasticities related to a demand function are of interest: |own price elasticity| > 1: demand is elastic |own price elasticity| < 1: demand is inelastic cross price elasticity > 0: related good is a substitute cross price elasticity < 0: related good is a complement income elasticity < 0: good is an inferior good income elasticity > 0: good is a normal good
Price elasticity of demand
Measures how Qd responds to a change in price = %changeQ/%changeP
Elastic; Qd responds a lot; one or more good substitutes; PelsD>1
Inelastic; Qd responds a little; Few or no good substitutes 1>PelsD; TR will inc. when P is inc. because as inelastic, the %change in Q is less than %change in P
Perfectly elastic; Qd decreases to 0 at a higher P; Vertical
Perfectly inelastic; Qd isn’t affected by P; Horizontal
Unitary elasticity; = 1; greatest point of TR
From max TR (unitary) an inc. in price moves toward elastic where %decreaseQD > %increaseP > decreasing TR
A dec. in P moves toward inelastic where %dec. P > %inc. QD > decreasing TR
Factors that affect Demand Elasticiy
Quality and availability of substitutes
Portion of income spent on the good
High inc; elastic
low inc; inelastic
Time (time since price change)
Long time; elastic
Short time; inelastic
Income Elasticity of Demand
%chngQd/%chngInc
+Normal goods; inc. inc leads to inc. Qd
-Inferior goods; inc. inc leads to dec. Qd
Cross Price Elasticity of Demand
%chngQd/%chngP related goods
Subs: +; Inc P of one related good will Inc D of other
-Complements; Inc P one good leads to D demand other good - gasoline and cars
More + better subs are, more - better complements are
