Chapter+5+Elasticity+and+Its+Application+JBS

=**Chapter 5 Elasticity and Its Application JBS **=

Key Terms:
 **Elasticity:** a measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants


 * Price Elasticity of demand**: a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price


 * Total Revenue:** the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold.

  == **The Price elasticity of demand and its determinants**  ==


 Price elasticity of demand is the value that determines how much the quantity demanded responds to a change in price. Demand for a good is elastic if the quantity demanded respond in a large chance due to the price change. It is inelastic if the change of quantity demanded is minimal.

There are general rules about the determinants of the price elasticity of demand.

-> Goods with many close substitutes are more elastic, because the consumers can easily find a replacement when the price change and the demand of the product change. When the price of a product change, the demand of its substitute will also be affected.
 * Availability of close substitutes**

-> Necessities are more inelastic, whereas the luxuries are elastic. This is because even if the price of a necessity change, one would still purchase the product because it is something that one NEEDS in order to survive. On the other hand, luxuries are products that are not necessary to survive. Because of this reason, people tend to not buy the luxuries if the price increase. This is an example of an elastic item.
 * Necessities versus luxuries**

-> The boundaries of the market also determine the elasticity of a product. If the boundaries are narrow, it would provide less substitutes, so it would be inelastic, because it is impossible to substitute with another product. Yet when the boundary is larger, it is easier to find other products that suit the same conditions. This would make the market to be an elastic one.
 * Definition of the market**

-> Goods have more elastic demand over longer time horizons. With several years of time period, the quantity of a product demanded falls substantially.
 * Time horizon**

==**Price Elasticity of Demand = (% Change in Quantity Demanded) / (% Change in Price) **  ==


<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> <span style="font-family: Tahoma,Geneva,sans-serif;">Because the quantity demanded is negatively related to its price, the percentage change of quantity demanded, and the percentage of price will have the opposite sign. Simply, a larger price elasticity implies a greater change in quantity demanded.

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<span style="color: #000000; font-family: Verdana; font-size: 11px; font-weight: normal; line-height: 18px;"> //Perfectly Inelastic Graph → Perfectly Elastic Graph// //<span style="color: #000000; font-family: Tahoma,Geneva,sans-serif;">→ Unit Elastic Graph //

<span style="color: #000000; font-family: Tahoma,Geneva,sans-serif;"> Elasticity = 0 Elasticity = infinity Elasticity = 1

Elastic graph will be defined as a graph that has the elasticity of greater than 1. ( Elasticity > 1)

Inelastic graph will be defined as a graph that has the elasticity of less than 1. ( Elasticity < 1) <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">

==**<span style="color: #00ffff; font-family: Tahoma,Geneva,sans-serif;">Price Elasticity of Demand = (% Change in Quantity Demanded) / (% Change in Price) **<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> ==

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<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> <span style="font-family: Tahoma,Geneva,sans-serif;">**//The midpoint formula//**


 * Price Elasticity of Demand = [(Q2-Q1) / (Q2+Q1)/2] / [(P2-P1) / (P2+P1)/2]** <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">

<span style="font-family: Tahoma,Geneva,sans-serif;"> = **Difference between Elastic and Inelastic Demand / Supply** =

<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Elastic Demand || <span style="font-family: Tahoma,Geneva,sans-serif;">Inelastic Demand ||
 * * Close substitute exist
 * Luxury goods
 * Long run
 * Big part of a budget || * No close substitutes
 * Necessities
 * Short Run (Example: Gasoline - at first, people drive, but later stop driving.)
 * Small part of a budge (do not matter in price) ||
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Elastic Supply || <span style="font-family: Tahoma,Geneva,sans-serif;">Inelastic Supply ||
 * * High flexibility of suppliers (Pizza)
 * Long Run || * Low flexibility of suppliers (Cars-need new machines...)
 * Short Run ||

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<span style="color: #00ffff; font-family: Tahoma,Geneva,sans-serif;">Relationship between Price Elasticity of Demand and Total Revenue:
<span style="font-family: Tahoma,Geneva,sans-serif;">Total Revenue **<span style="font-family: Tahoma,Geneva,sans-serif;"> - Amount paid by buyers and received by the sellers of the good. - P x Q - Price x Quantity
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">

In order to define the important relationships between price elasticity of demand and total revenue, there are three conditions that one needs to look at. One is when the demand is inelastic. If the demand is inelastic, then the price and the total revenue will move to the same direction. On the other hand, if the demand is elastic, the price and the total revenue will move in opposite directions. If the demand is unit elastic, then the total revenue will remain constant even when there is a change to the price.

<span style="font-family: Tahoma,Geneva,sans-serif;">
<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> <span style="font-family: Tahoma,Geneva,sans-serif;">Income Elasticity of Demand: Normal vs. Inferior = (% Change in Quantity Demanded) / (% Change in Income)

Cross-Price Elasticity of Demand: Substitutes vs. Complements = (% Change in Quantity Demanded) / (% Change in Price of Other)

Price Elasticity of Supply = (% Change in Quantity Supply) / (% Change in Price) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">

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<span style="font-family: Tahoma,Geneva,sans-serif;">
<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> <span style="font-family: Tahoma,Geneva,sans-serif;">Price Elasticity of Demand = (% Change in Quantity Demanded) / (% Change in Price)

Income Elasticity of Demand: Normal vs. Inferior = (% Change in Quantity Demanded) / (% Change in Income)

Cross-Price Elasticity of Demand: Substitutes vs. Complements = (% Change in Quantity Demanded) / (% Change in Price of Other)

Price Elasticity of Supply = (% Change in Quantity Supply) / (% Change in Price)

Midpoint Formula of price elasticity of demand = [(Q2-Q1) / (Q2+Q1)/2] / [(P2-P1) / (P2+P1)/2]

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<span style="color: #ff0000; font-family: Tahoma,Geneva,sans-serif;"> **Bibliography:**

<span style="font-family: Tahoma,Geneva,sans-serif;">
<span style="font-family: Tahoma,Geneva,sans-serif;"> http://www.answers.com/topic/price-elasticity-of-demand http://www.esaonline.org/Classes/Godoy/economics/APreview/elasticity.htm <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> <span style="font-family: Tahoma,Geneva,sans-serif;">