Chapter+5+-+Micro

=Chapter 5 - Elasticity and Its Application=

Vocabulary:

 * 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.
 * Income elasticity of demand:** a measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income.
 * Cross-price elasticity of demand** a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good.
 * Price elasticity of supply:** a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price.

Elastic and Inelastic
Elasticity is the measure of how much a change in the quantity of a good is made when there is a change in the price of that good. When an good has a large change after a small change in the price of that good, it is called to be **more elastic**. When a good has a small change even after a significant change in the price of that good, it is said to be **less elastic**, or **inelastic**. When there is no change in the quantity demanded of a good after a change in the price, it is called **completely inelastic**. Goods that are completely inelastic are ones that are usually necessities and those that have a change in the demand are normal goods.

Price elasticity of demand is determined by 4 factors.
Goods with other goods that have basically have the same function, or also known as substitutes, have high elasticities because the switch from one good to another in cases of when the prices change is easy. Necessities are inelastic because people need to buy them no matter the price, while as luxuries are elastic because people don't need to buy them. The size of the market matters because if the market is small and focussed in selling one type of good, the availability of substitutes for that good is much higher. Goods tend to be more elastic after a long time period because they will eventually find a substitute.
 * 1.** Availability of Close Substitutes:
 * 2.** Necessities versus Luxuries:
 * 3.** Definition of the Market:
 * 4.** Time Horizon:

Computing the Price Elasticity of Demand
Price elasticity of demand is calculated by:
 * Percentage change in quantity demanded ÷ Percentage change in price**

Because the percentage of moving from one point to another is difference from moving from the second point to the first, there is a more accurate way calculating the elasticity.
 * ((Quantity 2 - Quantity 1) ÷ average of the 2 quantities) ÷ ((Price 2 - Price 1) ÷ average of the two prices)**

Elastic - elasticity is higher than 1 Inelastic - elasticity is lower than 1 Unit Elastic - elasticity equals 1
 * 3 Types of Demands: Elastic, Inelastic, and Unit Elastic Demand**

Finding the Total Revenue
Total Revenue is found by the **Price X Quantity**

Other Demand Elasticities

 * Income Elasticity of Demand = Percentage Change in Quantity Demanded ÷ Percentage Change in Income**
 * Cross-Price Elasticity of Demand = Percentage Change in Quantity Demanded of Good 1 ÷ Percentage change in the Price of Good 2**

Elasticity of Supply
Elasticity of Supply is the measure of how much change in the quantity supplied is made when the price of that good changes. Inelastic supply means that it is impossible to make more of that item when there is a rise in the price of that good. Elastic supply means that it is easier to produce more when the price of a good rises. This is also effected by time horizon just like the elasticity of demand because over a period of time, factories can build more factories to produce more.

Calculating the Price Elasticity of Supply

 * Percentage Change in Quantity Supplied ÷ Percentage Change in Price**

Questions

 * 1) Which is more accurate, using the percentage change or using the average in finding the elasticity of demand?
 * 2) What is the elasticity of a good that has a demand with a inelastic curve?
 * 3) What is the elasticity of a necessity?
 * 1) Using the graph above, find the elasticity from price 3 to 5


 * Answers:**
 * 1) average
 * 2) Under 1
 * 3) is or almost is 0
 * 4) 100% ÷ 66% = 1.52

Pictures from: http://farm1.static.flickr.com/42/400179962_17e9a4851d.jpg http://www.webshells.com/college/grid9.jpg http://img.sparknotes.com/figures/5/5259b727009a2736d6ad639bab3494ff/elasline.gif