KEY TERMS

- Elasticity: how supply and demand respond to the alterations in the determinants
- Price elasticity of demand: the way the number of demand affects the price of a good. % Change in Quantity/ % Change in Price
- Total revenue: Price x Quantity sold. Therefore, the cost paid by the buyers and the price received by sellers.
- Income elasticity of demand: the way the number of demand alters depending on the consumer's income. %Change in Quantity/ % Change in income
- Cross-price elasticity of demand: how change in the price of one good affects the quantity demanded of another good. %change in quantity demanded of good A/ % change in price of good B
- Price elasticity of supply: the way the amount of supply changes the price of the product. % change in number supplied/ %change in price

For Example,

Determinants:

1. Availability of Close Substitutes
The demand for grape juice is elastic because if its price rises, people can buy mango juice, whose price did not rise. Therefore, grape juice has a close substitute, mango juice; hence, the demand for grape juice is elastic since people can buy mango juice instead.
2. Necessities vs. Luxuries
The demand for pants is inelastic because it is necessary in life. Imagine, world without pants, what would guys wear? Yet, a perfume is for self-maintenance more than a necessity. Therefore, even if the price of pants rises, people still buy it because they really need it. But, if the price of perfume rises, they don't because it's not a necessary object; moreover, it's just a luxury.
3. Definition of Market
If you're talking about a wide market, it's hard to determine the elasticity because the market would contain many proponents to it and it's hard to find the close substitute for a broad market, such as the clothing market.. Yet, if you specifically define a market, such as the shorts market, it's more elastic because it has a close substitute, such as the skirt market.
4. Time Horizon
Although some things might be unnecessary, sometimes it's hard to stop using them because you're so used to the objects being a part of your life. Therefore, objects such as cigarettes may be inelastic, despite its augmented price. Yet, in the long run it'd be more elastic because smokers may adjust to smoking less and at the not smoking at all. However, such processes take time to alter.

How to Calculate Price Elasticity of Demand

Price Elasticity of Demand= (% change in quantity / % change in price)

Using the Midpoint

Price Elasticity of Demand= (Q2-Q1)/[Q2+Q1)/2] divided by (P2-P1)/[(P2+P1)/2]

- The midpoint method is useful because when there are two points on the graph, mostly, their elasticities are different. Therefore, determining the midpoint of the two points is efficient to calculate the price elasticity of demand between the two points.

Different Types of Demand Curves


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Total Revenue and Price Elasticity of Demand

Total revenue is useful to learn the changes in a market. It is calculated through PxQ (price multiplied by quantity). Therefore, it shows the price paid by buyers and received by sellers of a certain object. The total revenue changes based on the elasticity of demand.
*when inelastic, price increases and quantity demanded slightly decreases. Therefore, tax revenue is bigger.
*when elastic, price increases and quantity demanded decrease in a larger proportion. Therefore, tax revenue is smaller.

Income Elasticity of Demand

income elasticity= % change in quantity demanded/ % change in income
*when income increases, and the demand for a good decreases, the good is called an inferior good.
*when income increases, and the demand for the good also increases, the good is called a normal good.

The Cross-Price Elasticity of Demand

cross-price elasticity of demand= % change in quantity demanded of good1/ % change in the price of good 2
*if the quantity demanded of good 1 increases at the same time as the increase of the price of good 2, they're substitutes. The reason is because the price of good2 rose; therefore, its quantity demanded dwindled. For, its substitute, good1, has a increase is the quantity demanded.
*if the quantity demanded of good 1 decreases at the same time as the increase of the price of good 2, they're complemented. The reason is because the price of good 2 rose; therefore, its quantity demanded decreased. Yet, the quantity demanded for good 1 also decreases; therefore, they are complements.

The Price Elasticity of Supply.

The price elasticity of supply is the reaction the quantity supplied has due to the change in price. The supply is said to be elastic if it reacts a lot to the change in price. Yet, it is said to be inelastic if it is only slightly influenced by the change of price.

How to Calculate Price Elasticity of Demand

Price Elasticity of Supply= (% change in quantity supplied / % change in price)

Different Types of Demand Curves


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http://tutor2u.net/economics/content/topics/elasticity/elasticity_of_supply.htm
http://www.businessbookmall.com/Economics_19_How_Elasticity_of_Demand_Affects_Total_Revenue.htm

Questions:
1. How does availability of close substitutes change the demand for good?
2. What happens to the tax revenue when the demand is inelastic?
3. Will Tiffany buy water even if the price rises from $2 to $3?
4. How does a perfectly elastic curve look like?


1. If the product A's price rises, people's demand will decrease if there's a close substitute. Therefore, people will buy product B instead since its price did not rise.
2. When inelastic, price increases and quantity demanded slightly decreases. Therefore, tax revenue is bigger.
3. Yes, she will. The reason is because water is a necessity. Therefore, Tiffany has to buy even if the price rises.
4. It is a horizontal line.