To Boil Chapter Twenty Down Even More

I. Price Elasticity of Demand A. The responsiveness of consumers to a price change is measured by a products price elasticity of demand. B. The Price-Elasticity Coecient and Formula 1. The degree of price elasticity or inelasticity of demand (Ed ) is dened as: Ed =
% in quantity demanded of product X % in price of product X

D. Arc Elasticity (Midpoint formula) 1. Percent change in quantity demanded = 2. Percent change in price = E. Graphical Analysis 1. For all downsloping straight-line and most other demand curves, demand is more price-elastic toward the upper left than toward the lower right.
1 2 1 2

quantity demanded quantity demanded

price price

Table 1. Summary of Price Elasticity of Demand Ed Ed > 1 Ed = 1 Demand Is: Elastic or relatively elastic Unit or Unitary elastic Description Price Increase Price Decrease % quantity > % demand TR TR % quantity = % demand No change TR No change TR

Ed < 1 Inelastic or relatively elastic % quantity < % demand

G. Determinants of Price Elasticity of Demand (SPLaT) 1. Substitutability 2. Proportion of Income 3. Luxuries versus Necessities 4. Time II. Price Elasticity of Supply A. The degree of price elasticity or inelasticity of supply(Es ) is dened as: Es =
% in quantity supplied of product X % in price of product X

B. The market period is the period that occurs when the time immediately after a change in the market is too short for producers to respond with a change in quantity supplied. C. The short run in microeconomics is a period of time too short to exchange plant capacity but long enough o use xed plant more or less intensively. D. The long run in microeconomics is a time period long enough for rms to readjust their plant sizes and for new rms to enter (or existing rms to leave) the industry.

III. Cross Elasticity and Income Elasticity of Demand. A. The consumption of a good is eected not only by changes in price, but changes in prices of related products or a change in income. 1. Cross elasticity of demand measures how sensitive consumer purchases of one product are to a change in the price of some other product. a. The coecient of cross elasticity of demand(Exy ) is dened as: Exy =
% in quantity demanded of product X % in price of product Y

2. Income elasticity of eemand measures the degree to which consumers respond to change in incomes by buying more or less of a particular good. a. The coecient of income elasticity of demand(Exy ) is dened as: Ei =
% in quantity demanded of product X % in income

Table 2. Cross and Income Elasticities of Demand Value of Coecient Ewz > 0 Exy < 0 Ei > 0 Ei < 0 Description Qw changes in same direction as Pz Qx changes in direction opposite of Py Q changes in same direction as income Q changes in direction opposite of income Type of goods Substitutes Complements Normal or superior Inferior