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Definition
shift in supply curve
(typically in response to price changes) |
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| "change in quantity supplied" |
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Definition
movements along the supply curve
(typically in response to "other supply-determining variables" such as lower wages, production costs, raw material costs, interest rates...) |
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| percentage change in one variable resulting FROM a 1-percent increase in another |
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| price elasticity of demand |
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Definition
percentage change in quantity demanded of a good resulting FROM a 1-percent increase in its price. i.e... "the change in quantity associated with a change in price"
FORMULA: Ep = (% change Q)/(% change P)
or...
Ep = (P/Q) times (change Q/ change P)
*usually a negative number |
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Definition
| demand curve that is a straight line (slope is constant) |
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| magnitude of price elasticity of demand |
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Definition
its absolute size
e.g. if Ep = -2, then the elasticity is 2 in magnitude |
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| demand is price elastic when... |
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Definition
| price elasticity is >1 in magnitude (typically when close substitutes exist) |
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| demand is price inelastic when... |
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Definition
| price elasticity is <1 in magnitude (typically when few close substitutes exist) |
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| main factors affecting price elasticity of demand |
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Definition
in general, price elasticity of demand depends on the availability of substitute goods.
i.e.... when there are close substitutes, a price increase will cause consumer to buy LESS of the good and MORE of the substitute. demand will then be highly price elastic. |
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| infinitely elastic demand |
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Definition
(a flat, horizontal demand curve)
principle that consumers will buy as much of a good as they can get a single price. BUT... for any higher price, the quantity demanded drops to zero, while for any lower price quantity demanded increases without limit. |
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| completely inelastic demand |
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Definition
(a vertical demand curve)
principle that consumers will buy a fixed quantity of a good, regardless of its price |
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Definition
| price elasticity calculated over a range of prices |
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| measuring price elasticity of demand... |
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Definition
| must be done at a particular point on the demand curve. this is because it will generally change as you move along the curve. |
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Term
| Income elasticity of demand |
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Definition
percentage change in the quantity demanded resulting from a 1-percent increase in income
* demand for goods usually rises when aggregate incomes rise
FORMULA: IEoD = (% Change in Quantity Demanded)/(% Change in Income) |
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| cross-price elasticity of demand |
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Definition
how demand for some goods is affected by prices of other goods
DEF: percentage change in the quantity demanded of one good resulting from a 1-percent increase in the price of another
FORMULA: CPEoD = (% Change in Quantity Demand for Good X)/(% Change in Price for Good Y)
*positive when goods are substitutes (when the price of butter goes up, so too will demand for margarine)
*negative when compliments (the cross-price elasticity of motor oil with respect to gasoline is negative, since increases in gas prices make people drive less, pushing down demand for motor oil) |
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| cross-price elasticity of demand |
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Definition
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| price elasticity of supply |
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Definition
percentage change in quantity supplied resulting from a 1-percent increase in price.
*usually positive, since higher prices give producers incentives to increase output |
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| variables that affect elasticities of supply |
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Definition
- prices (price elasticity of supply -- usually positive)
- production costs (wages, raw materials, etc -- usually negative, since higher costs put downward pressure on production) |
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Definition
| elasticities at any particular point on the demand curve or supply curve |
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| calculating elasticity over a portion of the demand or supply curve |
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Definition
price elasticity calculated over a range of prices
*rather than choosing either the initial or the final price, we use an average of the two
FORMULA (for any elasticity ** verify this): [[QDemand(NEW) - QDemand(OLD)] / [QDemand(OLD) + QDemand(NEW)]]*2 |
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still need to review:
short-run vs long-run elasticities
effects of gov-intervention/price controls
practice Qs |
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