CHAPTER+5

=ELASTICITY AND ITS APPLICATION  =

media type="youtube" key="x5EKPX_atQo" width="425" height="350" = = __**elasticity: **__ measures reaction (change in price vs. quantity demanded) - if one knows elasticity, one can predict what will happen to quantity demanded when price changes (a little or a lot)

ELASTICITY OF DEMAND
media type="youtube" key="2krwBxvnsUg" width="425" height="350" __**price elasticity of demand: **__ measures how much the quantity demanded responds to a price change (negative slope) - the above is the formula of calculating the price elasticity of demand - to make this process more accurate, a more precise formula is used when calculating price elasticity of demand with numerous data (a.k.a. midpoint formula): __(Q1 – Q2) / [(Q1 + Q2) / 2]__ blahb lDFSDFADFASah l (P1 – P2) / [(P1 + P2) / 2] - this formula is the most often used formula and is effective with any sets of data THE VARIETY OF DEMAND CURVES ** - there are several different types of demand curves that let us know whether the curve is ELASTIC, INELASTIC, or, UNIT ELASTIC - FLATTER the curve, the more ELASTIC it is (go through lots of change) - STEEPER the curve, the more INELASTIC it is (go through less change) - PERFECTLY INELASTIC DEMAND (meaning elasticity = 0) is a vertical curve which represents that the quantity demanded never changes no matter what the price may be (likely to be a necessity) - PERFECTLY ELASTIC DEMAND (meaning elasticity = infinity) is a horizontal curve which represents that at a price below $?, quantity demanded is infinite, and at a point above $?, the quantity demanded is zero. Thus, at exactly $?, consumers will buy any quantity
 * THE PRICE ELASTICITY OF DEMAND AND ITS DETERMINANTS **
 * COMUPTING THE PRICE ELASTICITY OF DEMAND **
 * 

__**total revenue: **__ amount paid by buyers and received by sellers - **TOTAL REVENUE = PRICE X QUANTITY**
 * TOTAL REVENUE AND THE PRICE ELASTICITY OF DEMAND **

- the total revenue change along the curve depends on ELASTICITY OF DEMAND - if demand is ELASTIC, a rise in price causes a rise in total revenue - if demand is ELASTIC, a fall in price causes a fall in total revenue - because demand is elastic, reduction in quantity demanded is so great that it offsets the increase in the price

-* when demand is INELASTIC, PRICE and TOTAL REVENUE move to the same direction (+ve) - * when demand is ELASTIC, PRICE and TOTAL REVENUE move in the opposite direction (-ve) - * if demand is UNIT ELASTIC, TOTAL REVENUE remains constant when price changes

- INELASTIC DEMAND - low price, high quantity (steep curve) lDFSDFADFdfsdfsASah - as price goes up, total revenue goes up - ELASTIC DEMAND - high price, low quantity (flat curve) lDFSDdfsdFADFASah - as price goes up, total revenue falls

__**income elasticity of demand: **__measures how much the quantity demanded responds to a change in consumer's income lDFSDFADFASah lDFSDFSah = __PERCENTAGE CHANGE IN QUANTITY DEMANDED__ lDFSDFADFADFSSah lDFSDFADFASah PERCENTAGE CHANGE IN INCOME - normal goods: higher income raises quantity demanded lDFSDFADFAdf : move in same direction, thus **+ve** - inferior goods: higher income lowers the quantity demanded lDFdFADFASah : move in opposite directions, thus **-ve** lDFSDFADFASah lDFfdfsdSDFSah = __PERCENTAGE CHANGE IN QUANTITY DEMANDED OF GOOD 1__ lDFSDFADFADFSSah lDFSSDFDFADFASah PERCENTAGE CHANGE IN PRICE OF GOOD 2 - whether the cross-price elasticity is a positive or negative number depends on whether the two goods are substitutes or complements - when **+ve** = substitutes - when **-ve** = complements
 * OTHER DEMAND ELASTICITIES **
 * __cross-price elasticity of demand: __** measures how much the quantity demanded of one good responds to a price change of another good

ELASTICITY OF SUPPLY
 __**<span style="color: rgb(4, 143, 33)">price elasticity of supply: **__ measures how much the quantity supplied responds to a change in price - supply is usually more elastic in the long run than in short run
 * <span style="color: rgb(33, 54, 222)">THE PRICE ELASTICITY OF SUPPLY AND ITS DETERMINANTS **<span style="color: rgb(33, 54, 222)">

= __PERCENTAGE CHANGE IN QUANTITY SUPPLIED__ SDFADFS PERCENTAGE CHANGE IN PRICE THE VARIETY OF SUPPLY CURVES ** - very similar to the demand curves (same characteristics)
 * <span style="color: rgb(33, 54, 222)">COMPUTINGTHE PRICE ELASTICITY OF SUPPLY **
 * <span style="color: rgb(33, 54, 222)">

=QUESTIONS FOR REVIEW= Q1. Why are necessities more inelastic compared to luxuries? A1. <span style="color: rgb(138, 10, 116)">Necessities are more inelastic than luxuries because our demand for necessities doesn't necessarily change based on price. If the cost of water last year was $2 per bottle, and it raised up to $4 this year, would you consume less water? Although the cost for a bottle of water increases, your demand for a "must-have" in your life won't change dramatically, since you need the same amount of water this year just as much as last year. On the other hand, your demand for orange juice may decrease as price increases. If the price of orange juice increases $3 compared to last year, would you want it as much as you did before? The answer is not likely. One can survive without orange juice, however one cannot survive without water. Thus, the changes in behaviour people make depending on price for necessities is inelastic.

Q2. What's the purpose of using MIDPOINT FORMULA instead of the regular (price elasticity of demand) formula? A2. <span style="color: rgb(138, 10, 116)">Often, the data given in problems (as in questions) involving price elasticity of demand contain lots of points to plot. Thus, when calculating the price elasticity of demand with the regular formula causes error since percent change between data set 1 & 2 and data set 3 & 4 are different. The mid point formula allows us to find the average of the whole data set making sure that the outcome is always the same between numerous data sets provided. This avoids significant errors and give the most accurate result possible. (The formula is recommended to use for all problems involving price elasticity of demand) CITATION http://economicobjectorvism.files.wordpress.com/2007/06/elasticities-graphs.png http://investors.divx.com/common/glossary/7175.gif http://www.youtube.com/watch?v=x5EKPX_atQo http://www.webshells.com/college/grid10.jpg http://www.uxc.com/cover-stories/uxw_18-39-chart.gif