Microeconomics Chapter 5 example #51530

A calculated price elasticity of demand measures the response of the quantity demanded to a particular change in price. It compares the percent change in quantity demanded to the percent change in price as a point moves along a demand curve

This approach calculates changes in a variable compared with the average, or midpoint, of the starting and final values

When demand is perfectly inelastic, the demand curve is a vertical line. This occurs when the percent change in the quantity demanded is zero for any change in the price

When demand is perfectly elastic, the demand curve is a horizontal line. The horizontal demand curve implies an infinite price elasticity of demand

Products tend to be more elastic if there are various readily substitutes available, the product takes up a large amount of income, and if they are necessary right in the moment.

Products tend to be more inelastic if there are not adequate substitutes available, the product does not cost a lot of income, and if they are needed right in the moment.

Products are unit-elastic when a certain percentage of a change in price causes the exact same percentage of change in quantity demanded

Total revenue is qual to the price multiplied by the quantity sold. Sellers can calculate total revenue to try and determine a price to sell their product/service for to maximize sales.

Cross-price elasticity of demand is equal to the percent change in the quantity demanded of one good divided by the percent change in the other good's price. When two goods are substitutes, the cross-price elasticity of demand is positive: a rise in the price of one substitute increases the demand for the other. If the goods are close substitutes, the cross-price elasticity will be positive and large; if not close substitutes, the cross-price elasticity will be positive and small. When two goods are complements, the cross-price elasticity will be negative. Very negative=strong complements.

Income elasticity of demand allows people to determine whether a good is a normal or inferior good as well as a measure how intensely the demand for the good responds to changes in income. If the income elasticity of demand is positive, the good is a normal good, when negative, the good is inferior

When income rises, the demand for income-elastic goods rises faster than income. Luxury goods such as second homes and international travel tend to be income-elastic.

When income rises, the demand for income-inelastic goods rises, but more slowly than income. Necessities such as good and clothing tend to be income-inelastic.

When moving up and down a supply curve, the change in quantity supplied, for a perfectly inelastic supply, will be zero, whatever the change in price. A perfectly inelastic supply curve is a vertical line.

Cases of perfectly elastic supply show that even a tiny increase in the price leads to huge increases in the quantity supplied. A perfectly elastic supply curve is a horizontal line.