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What is the Midpoint Formula for Elasticity of Demand used for?
What is the Midpoint Formula for Elasticity of Demand used for?
Comparing elasticity at different points on the demand curve
What does the Midpoint Formula use in the numerator?
What does the Midpoint Formula use in the numerator?
Average quantity
What does the Midpoint Formula use in the denominator?
What does the Midpoint Formula use in the denominator?
Average price
What is the result of elasticity using the midpoint formula?
What is the result of elasticity using the midpoint formula?
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Define price elasticity of demand.
Define price elasticity of demand.
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What does it mean if the price elasticity of demand is greater than 1?
What does it mean if the price elasticity of demand is greater than 1?
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The symbol for elasticity is ___?
The symbol for elasticity is ___?
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What happens to total revenue when the price of movie tickets is increased in the inelastic portion of the demand curve?
What happens to total revenue when the price of movie tickets is increased in the inelastic portion of the demand curve?
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What type of goods have negative cross-price elasticity?
What type of goods have negative cross-price elasticity?
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What does unit elastic demand mean?
What does unit elastic demand mean?
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If price elasticity is less than 1, demand is elastic.
If price elasticity is less than 1, demand is elastic.
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Price elasticity of supply can be positive or negative.
Price elasticity of supply can be positive or negative.
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_______ has zero price elasticity of supply.
_______ has zero price elasticity of supply.
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Study Notes
Elasticity
- Price Elasticity of Demand: measures responsiveness of quantity demanded to changes in price, expressed as a percentage change in quantity demanded in response to a 1% change in price.
- Formula: ε = (percentage change in quantity demanded) / (percentage change in price)
- Elastic demand: ε > 1 (quantity demanded responds strongly to price changes)
- Inelastic demand: ε < 1 (quantity demanded responds weakly to price changes)
- Unit elastic demand: ε = 1 (quantity demanded responds equally to price changes)
Determinants of Price Elasticity of Demand
- More options, more elastic
- Large share of budget, more inelastic
- Long time to adjust, more elastic
Examples of Elasticities
- Green peas: 2.8 (elastic)
- Restaurant meals: 1.6 (unit elastic)
- Beer: 1.2 (inelastic)
- Coffee: 0.3 (inelastic)
Graphical View of Price Elasticity
- ΔQ / Q = ε x ΔP / P
- Slope of the demand curve affects price elasticity
- At the midpoint, demand is unit elastic
- At high P and low Q, demand is elastic
- At low P and high Q, demand is inelastic
Unintended Effects of the Yacht Tax
- Hypothesis: Luxury tax on yachts over $100,000 would yield $31 million in tax revenue
- Actual tax revenue: $16.6 million (people bought yachts outside the US to avoid the tax)
Price Elasticity Notation
- ε = (percentage change in quantity demanded) / (percentage change in price)
- ΔQ is the change in quantity, ΔP is the change in price
Special Cases
- Perfectly Elastic Demand: infinite price elasticity of demand
- Perfectly Inelastic Demand: zero price elasticity of demand
Cross-Price Elasticity of Demand
- measures responsiveness of quantity demanded of good A to changes in the price of good B
- Sign of cross-price elasticity shows the relationship between the goods
- Complements: negative cross-price elasticity
- Substitutes: positive cross-price elasticity
Income Elasticity of Demand
- measures responsiveness of quantity demanded to changes in income
- Positive income elasticity: normal good
- Negative income elasticity: inferior good
Price Elasticity of Supply
- measures responsiveness of quantity supplied to changes in price
- Formula: ε = (percentage change in quantity supplied) / (percentage change in price)
Determinants of Price Elasticity of Supply
- Supply curve with a positive intercept: price elasticity of supply decreases as Q increases
- Supply curve with a zero intercept: price elasticity of supply is 1.00### Perfectly Elastic Supply
- A perfectly elastic supply means selling all units at a fixed price with no volume discounts.
- The cost of production remains constant at $0.14 for all levels of quantity.
- An example of this is a lemonade stand where the cost of production is $0.14.
Determinants of Price Elasticity of Supply
- Input flexibility leads to more elastic supply as resources can adapt to changes.
- Mobility of inputs increases elasticity as resources can be moved to where they are needed.
- The use of substitute inputs makes supply more elastic.
Gas Prices and Car Prices
- Short-run elasticity of demand for gasoline is smaller compared to car prices.
- This is because it is difficult to adjust quickly to changes in gas prices.
- Supply of cars is relatively stable, and inputs are readily available.
Supply Bottleneck: Unique Inputs
- The supply of a product becomes inelastic if it relies on a single unique input with no alternatives.
- Examples include sports stars, actors, and musicians who have unique talents.
- Over time, producers can develop alternative production methods, making supply more elastic.
The Midpoint Formula for Elasticity of Demand
- Elasticity of demand changes at each point on the demand curve.
- The midpoint formula is used to calculate elasticity, taking into account average quantity and price.
- The formula is: ε = ΔQ / [(QA + QB)/2] / ΔP / [(PA + PB)/2].
- Using the midpoint formula provides a more stable solution.
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Description
This quiz covers the concept of elasticity in economics, including the definition of price elasticity of demand, how to calculate it, and the factors that determine elasticity.
