Micro Chap 4

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Author:
bwood190
ID:
260151
Filename:
Micro Chap 4
Updated:
2014-02-06 00:57:27
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Microeconomics Chap
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Micro ch. 4
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  1. Price Elasticity of Demand
    units free measure of the responsiveness of the qty demanded of a good to a change in its price when all other influences remain the same
  2. FORMULA
    • (Change in qty / average qty)/(change in price / average price)
    • Units free measure
  3. Perfectly Inelastic Demand
    • if qty remains constant when a change in price occurs
    • Ed = 0
    • eg. insulin
  4. Unit Elastic Demand
    E= 1
  5. Inelastic Demand
    • E= b/w 0 and 1
    • eg. food
  6. Perfectly Elastic Demand
    Huge qty demand change to small price change
  7. Elastic Demand
    Ed = >1
  8. Linear Demand Curve
    • shows elasticity
    • ed changes depending on where you are on graph
    • midpoint should be 1
  9. Total Revenue
    • price of good * qty sold
    • changes w/ changes in price
  10. Elastic (rev.)
    • 1% price cut = increase qty sold >1%
    • total rev increases
  11. Inelastic (rev)
    • 1% price cut = increase qty sold <1% 
    • total rev down
  12. Unit Elastic (rev)
    • 1% price cut = increase qty sold by 1%
    • no change in rev
  13. Total Revenue Test
    • method of estimating price elasticity of demand by observing change in revenue when all other influences remain the same
    • Price cut increases total revenue, demand is elastic 
    • Price cut decreases total revenue, demand is inelastic
    • Price cut doesn't change total rev, demand is unit elastic
  14. Your Expenditure
    • Elastic - price cut 1%, increase qty purchased by >1%
    • Inelastic - price cut 1%, increase qty purchased by <1%
    • Unit Elastic - price cut 1%, increase qty purchased by 1%
  15. Factors that Influence
    • elasticity of demand depends on 3 factors
    • closeness of substitute
    • proportion of income spend on good
    • time elapsed since price changed
  16. Closeness of Substitute
    • closer substitutes, more elastic demand
    • necessity - poor substitutes or crucial for well being. Food is generally inelastic
    • Luxuries - many substitutes, elastic demand
  17. Income Spent on Good
    • more spend, more elastic demand for it
    • eg gum vs house price. Don't notice change in price of gum
  18. Time elapsed since Price Change
    • more time, more elastic demand
    • or longer it can be stored w/o losing value
    • <time <responsive
  19. Cross Elasticity of Demand
    • measure demand and change in price of a substitute or compliment
    • substitutes - positive. goes in same direction. price of burger up, price of pizza up
    • compliments - negative. opposite directions. price of sugar up, price of tea down
  20. Income Elasticity of Demand
    • demand for good and change in income, other things remaining the same
    • >1 - normal good, elastic income. % spent on good up as income increases
    • 0<1 - normal good, inelastic income. % spent on good down as income increases
    • negative - inferior good.% spent down as income increases
  21. Elasticity of Supply
    • qty supplied to a change in selling price
    • Elastic = >1
    • Inelastic = 0<1
    • Unit elastic = 1
    • Perfectly inelastic = 0

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