ch. 5
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Elasticity
 measures how much one variable responds to another
 numerical measure of responsiveness of Qd or Qs to one of its determinants

price elasticity equation
% change in quantity/ % change in Price

midpoint method equation
(end value start value)/midpoint * 100

price elasticity of demand is high when
 close substitutes are available
 narrowly defined goods (blue jeans rather than just clothing)
 if item is a luxury
 in the long run

perfectly inelastic
 Price E. is = 0
 vertical line
 no price sensitivity

inelastic
 relatively steep
 low sensitivity
 less than 1 PE<1

unit elastic
 PE = 1
 intermediate slope


perfectly elastic
 horizontal line
 PE = infinity

total revenue
price * quantity

if demand is elastic then revenue and price
 move in opposite directions
 negative correlations

if demand is inelastic then price and total revenue
 move in the same direction
 positive correlation

elasticity rule of thumb
the flatter the slope the higher the elasticity
the steeper the slope the lower the elasticity

determinants of supply elasticity
 depends on the flexibility of sellers to change amount of good they produce
 (ex: its harder to produce more beachfront)

for many goods price elasticity of supply is ____ in the long run than in the short run
higher/ more elastic

income elasticity of demand measures
how the quantity demanded changes as consumer income changes
% change in quantity demanded/ % change income

income elasticity is ___ correlated to normal goods
positively

income elasticity is ___ correlated to inferior goods
negatively

cross price elasticity of demand
measures how the quantity demanded of one good responds to a change in the price of another good
% change in Qd of good 1/ % change in price of good #2

cross price elasticity of demand is ____ correlated to substitutes
positively

cross price elasticity of demand is ___ correlated to complements
negatively