elasticity
measures responsiveness depending on a certain variable – sensitive to price changes
price of elasticity of demand
measures how much quantity demanded responds to changes in price
total revenue
amount of money sellers get when they sell a good
price effect
increase in price means each unit sells for more leading to an increase in revenue
quantity effect
an increase in price can lead to a decrease in quantity demanded thus leading to lower revenue
factors for price elasticity of demand
- number of close substitutes
- is it essential?
- how big is the market?
- share of consumer budget
- short/long run demand
income elasticity of demand
measures how responsive quantity demand is to changes in consumer income
cross-price elasticity demand
measures how responsive quantity good is to the change in price of another good `
complement good (CPED)
demand is linked to another goods demand, therefore value is negative
substitute good (CPED)
satisfies a similar need therefore increase price of one good leads to an increase in demand for another (positive value)
price elasticity of supply
shows how responsive sellers are to price changes
law of supply
tells us supply curves always slope up because increase in price equals to price in quantity
factors for price elasticity of supply
- how easy it is to access inputs
- time horizons (longer time horizons have more elasticity)
price ceiling
maximum price a good can be sold at
when is price ceiling binding
price ceiling below equilibrium price
when is price ceiling NOT binding
price ceiling above equilibrium price
what is the result of price ceiling
shortages because there is a decrease in supply and increase in demand
shortage complications
- long line-ups
- decline in quality (bcs they cannot increase price because of price ceiling)
- discrimination (sellers can pick and chose their customers)
price floors
minimum price a good can be sold at
when is price floor binding
price floor has to be above equilibrium price
when is price floor NOT binding
when price floor is below equilibrium price
problems with setting floor price
- black markets (sold illegally)
- prevents mutually beneficial trades from happening in competitive market
elasticity demand
how consumers react to price changes
income elasticity
how demand changes when consumer income shifts
