CHAPTER+5+.+ELASTICITY+AND+ITS+APPLICATION+;)

= ELASTICITY AND ITS APPLICATION = 

*Elasticity: Measurement of how much consumers respond to changes in price, income, and the price of substitutes.

=__THE PRICE ELASTICITY OF DEMAND __= Price elasticity of demand measures how much the quantity demanded responds to a change in price. A demand is elastic when quantity demanded changes largely due to the change in price, and is inelastic if it slightly responds to price.

 However, Price level is not the only factor that affects the elasticity of demand! Other factors that determine the price elasticity of demand are:

 Goods with close substitutes have more elastic demand because consumers could easily replace a certain good with another. For example, butter and margarine are close substitutes. An increase in price of either one of them will cause a quantity demanded for the other one to rise.
 * 1. Availability of Close Substitutes**

 Necessities have inelastic demands, while luxuries have elastic demands.
 * 2. Necessities VS. Luxuries**

Narrowly defined markets have more elastic demands than broadly defined markets because it is easier to find close substitutes for narrowly defined goods.
 * 3. Definition of the Market**

For example, food, which is a broad category, has an inelastic demand because there are no good substitutes for "food." However, ice cream has numerous substitutes, which makes consumers have an elastic demand.

 Goods have more elastic demand over longer time horizons. People's preferences change over time, which makes a good elastic in a long time period.
 * 4. Time Horizon**

 = HOW TO CALCULATE PRICE ELASTICITY OF DEMAND  =

Price Elasticity of Demand= (% change in quantity / % change in price) => "midpoint method."


 Price Elasticity of Demand=(Q2-Q1)/[Q2+Q1)/2] ÷ [(P2-P1)/[(P2+P1)/2]
 = THE VARIETY OF DEMAND CURVES =

= Total Revenue&Price Elasticity of Demand =  Total revenue=Price X Quantity The total revenue changes with the elasticity of demand. Elastic: Price increases,quantity demanded decreases largely. => smaller tax revenue. Inelastic: Price increases, quantity demanded decreases slightly. => bigger tax revenue.

= Income Elasticity of Demand = <span style="font-family: 'Lucida Console',Monaco,monospace;"> Income elasticity= (% change in quantity demanded) ÷ (% change in income) Inferior good- quantity demanded decreases as income increases. Normal good- quantity demanded increases as income increases.

= The Cross-Price Elasticity of Demand = <span style="font-family: 'Lucida Console',Monaco,monospace;"> Cross-price elasticity of demand= (% change in quantity demanded of good1) ÷ (% change in the price of good 2) Substitutes: Price of good 1 and quantity demanded of good 2 increase together (positive cross-price elasticity) Complements: Has a negative cross-price elasticity.

=__ THE ELASTICITY OF SUPPLY __= <span style="font-family: 'Lucida Console',Monaco,monospace;"> Price elasticity of supply: Measurement of how much the quantity supplied of a certain good changes according to the change in price of the good.

<span style="font-family: 'Lucida Console',Monaco,monospace;">***Price Elasticity of Supply= (% change in quantity supplied) ÷ (% change in price)
= THE VARIETY OF SUPPLY CURVES =

= ////GLOSSARY//// = <span style="font-family: 'Lucida Console',Monaco,monospace;">
 * Elasticity: Measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants.


 * Total Revenue: Amount paid by buyers and received by sellers of a good.


 * Income elasticity of demand: measure of how much the quantity demanded of a good responds to a change in consumer's income.


 * Cross-price elasticity of demand: Measure of how much the quantity demanded of one good responds to a change in the price of another good.


 * Price elasticity of supply: Measure of how much the quantity supplied of a good responds to a change in the price of the good.