Elasticity chapter 20 How do I know how much quantity demanded changes when price changes???????

Elasticity  Def-responsiveness to change  How responsive is demand to a change in price?  How responsive is supply to a change in price?  Depends on:  Number of substitutes  More substitutes---more elastic  Income  Larger % of budget---more elastic  Necessity vs. luxury  Bread/milk--inelastic  Time  Short term—inelastic  Long term-elastic—find substitutes

How to figure out Elasticity?  Midpoint Formula  Change in Qd  (Q1 +Q2) divided by 2  Divided by  Change in price  (p1 + p2) divided by 2 E d = Percentage change in quantity demanded of product X Percentage change in price of product X

Perfectly Inelastic

Perfectly Elastic

Elasticity as a Range  The higher the price-  the more elastic  The lower the  price—  the less elastic

Total Revenue Test Elastic-if price increases—total revenue decreases Inelastic-If price increases—total revenue increases

Income Elasticity of Demand  % change in Qd  % change in Income  Income increases----causes increase in Qd---normal good  Income increases—causes a decrease in Qd—inferior goods

Cross Elasticity Of Demand  % change in Qd of product X  %change in Qd of product Y  If complements—negative #  If substitutes—positive #

Price Elasticity of Supply  %change in Qs  %change in price  Key issue-time  Market period  Short run  Long run

PoPo PmPm P Q D1D1 QoQo D2D2 An increase in demand without enough time to change supply causes… an increase in price SmSm Immediate Market period PRICE ELASTICITY OF SUPPLY

PoPo P Q D1D1 QoQo D2D2 Short Run PRICE ELASTICITY OF SUPPLY PsPs An increase in demand with less intensity supply use causes...a lower increase in price SsSs QsQs

PoPo P Q D1D1 QoQo D2D2 Long Run PRICE ELASTICITY OF SUPPLY PLPL An increase in demand in the long run allows greater change causing... SLSL QLQL Even more elastic response - less price increase