Chapter 5 Elasticity and its Application Price elasticity of demand measure of how much the quantity demanded responds to a change in price Elastic quantity demanded responds substantially to changes in price Inelastic quantity demanded responds only slightly to demand in price Factors that influence Price elasticity of demand Availability of Close substitutes Necessities vs Luxuries Definition of the Market Narrowly defined market higher elastic demand Broadly defined marker inelastic demand Time Horizon Price elasticity of demand change in quantity demanded change in price The flatter the demand curve that passes through a given point the greater the price elasticity of demand The steeper the demand curve that passes through a given point the smaller the price elasticity of demand The Midpoint Method Why do we use it When percentage changes are calculated from a different base it could come up with different answers and are not constant By using the mid point method it gives us the same answer regardless of direction Price Elasticity of Demand Q2 Q1 Q2 Q1 2 P2 P1 P2 P1 2 Total Revenue the amount paid by buyers and received by sellers of any good PxQ On a linear demand curve its elasticity is NOT constant While some parts are inelastic some are elastic Elasticity ratio of changes in 2 variables Slope ratio of changes of 2 variables At points with a low price and high quantity the demand curve is inelastic At points with a high price and low quantity the demand curve is elastic Income elasticity of Demand measure of how the quantity demanded changes as consumer income changes Percentage change in quantity demanded percentage change in income Cross Price elasticity of Demand measure of how the quantity demanded of one good responds to a change in the price of another good CPED change in quantity demanded of good 1 change in price of good 2 Price elasticity of Supply measure of how much the quantity supplied responds to changes in the price Supply of good is elastic if quantity supplied responds substantially to changes in the price Supply of good is inelastic if quantity supplied responds only slightly to changes in the price Factors that determine price elasticity of supply Time Flexibility of sellers The Variety of Supply Curves In the long run when supply and demand are more elastic the same reduction in supply measured by the horizontal shift in the supply curve caused a smaller increase in the price