Principles of MicroEconomics: Econ102

Price Elasticity of Demand: The responsiveness of the quantity demanded to a change in price, measured by dividing the percentage change in the quantity demanded of a product by the percentage change in the product’s price. Measuring the Price Elasticity of Demand

Relatively Elastic Demand: Demand is elastic when the percentage change in quantity demanded is greater than the percentage change in price, so the price elasticity is greater than 1 in absolute value. Relatively Elastic Demand and Relatively Inelastic Demand Relatively Inelastic Demand: Demand is inelastic when the percentage change in quantity demanded is less than the percentage change in price, so the price elasticity is less than 1 in absolute value. Unit-elastic Demand: Demand is unit-elastic when the percentage change in quantity demanded is equal to the percentage change in price, so the price elasticity is equal to 1 in absolute value.

Perfectly Inelastic Demand: The case where the quantity demanded is completely unresponsive to price, and the price elasticity of demand equals zero. Perfectly Elastic Demand: The case where the quantity demanded is infinitely responsive to price, and the price elasticity of demand equals infinity.

1. A 33% cut in price… Demand $30 Price Quantity …….causes a 75% increase in quantity demanded. The Case of Elastic Demand Therefore, demand is elastic when…… the % change in Qd is greater than the % change in Price resulting in an absolute value greater than 1 Total Revenue before price cut: =C+D = $480 Demand $30 Price Quantity Total Revenue after price cut = D+E = $560 Therefore, cutting price when demand is price elastic…… INCREASES Total Revenue. A E=$240 D= $320 C=$160 B Total revenue: The total amount of funds received by a seller of a good or service, calculated by multiplying price per unit by the number of units sold.

1. A 33% cut in price… Demand $30 Price Quantity …….causes a 25% increase in quantity demanded. The Case of In-Elastic Demand Therefore, demand is inelastic when…… the % change in Qd is less than the % change in Price resulting in an absolute value less than 1 Total Revenue before price cut: =C+D = $480 Demand $30 Price Quantity Total Revenue after price cut = D+E = $400 Therefore, cutting price when demand is price inelastic…… REDUCES Total Revenue. A E= $80 D= $320 C=$160 B Total revenue: The total amount of funds received by a seller of a good or service, calculated by multiplying price per unit by the number of units sold.

1. A 33% cut in price… Demand $30 Price Quantity …….causes a 33% increase in quantity demanded. The Case of Unit-Elastic Demand Therefore, demand is unit-elastic when…… the % change in Qd is equal to the % change in Price resulting in an absolute value equal to 1 Total Revenue before price cut: =C+D = $480 Demand $30 Price Quantity Total Revenue after price cut = D+E = $480 Therefore, cutting price when demand is unit-elastic…… leaves Total Revenue UNCHANGED A E= $160 D= $320 C=$160 B Total revenue: The total amount of funds received by a seller of a good or service, calculated by multiplying price per unit by the number of units sold.

Demand $30 Price Quantity Any increase in price causes quantity demanded to fall to zero Perfectly Elastic Demand If demand is perfectly elastic…… Then the absolute value of price elasticity is equal to infinity. 1. An increase or decrease in price…… Demand $40 Price Quantity …….leaves the quantity demanded unchanged. Perfectly In-Elastic Demand 20 If demand is perfectly inelastic…… Then the absolute value of price elasticity is equal to zero. 16

Availability of Close Substitutes Passage of Time Luxuries versus Necessities Definition of the Market: narrowly defined markets have more substitutes, i.e. cereals Share of a Good in a Consumer’s Budget

To estimate the price elasticity of demand, economists need to know the demand curve for a product. To calculate the price elasticity of demand for new products, firms often rely on market experiments. With market experiments, firms try different prices and observe the change in quantity demanded that results.

Cross-price Elasticity of Demand: The percentage change in quantity demanded of one good divided by the percentage change in the price of another good. Measuring the Cross-Price Elasticity of Demand

IF THE PRODUCTS ARE... THEN THE CROSS-PRICE ELASTICITY OF DEMAND WILL BE. … EXAMPLE substitutespositive Two brands of digital music players complementsnegativeDigital music players and song downloads from online music stores unrelatedzero Digital music players and peanut butter

Income elasticity of demand: A measure of the responsiveness of quantity demanded to changes in income, measured by the percentage change in quantity demanded divided by the percentage change in income. Measuring the Income Elasticity of Demand

IF THE INCOME ELASTICITY OF DEMAND IS...THEN THE GOOD IS... EXAMPLE positive, but less than 1normal and a necessity Milk positive and greater than 1normal and a luxuryCaviar negativeinferior High-fat Meat

Elasticity and the Disappearing Farm

Price Elasticity of Supply: The responsiveness of the quantity supplied to a change in price, measured by dividing the percentage change in the quantity supplied of a product by the percentage change in the product’s price. Measuring the Price Elasticity of Supply

Whether supply is elastic or inelastic depends on the ability and willingness of firms to alter the quantity they produce as price increases. Often, firms have difficulty increasing the quantity of the product they supply during any short period of time.

Why Are Oil Prices So Unstable? Making the Connection

Polar Cases of Perfectly Elastic and Perfectly Inelastic Supply Summary of the Price Elasticities of Supply

Polar Cases of Perfectly Elastic and Perfectly Inelastic Supply Summary of the Price Elasticities of Supply (continued)

Using Price Elasticity of Supply to Predict Changes in Price Changes in Price Depend on the Price Elasticity of Supply