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Chapter 6 unit 3 - Coggle Diagram
Chapter 6 unit 3
Elasticity
Income elasticity of demand
Ei = percentage change in quantity demanded divided by percentage change in income
Understand Normal goods and inferior goods
Inferior goods
Higher income means lower demand
Ei = negative
Normal goods
Higher income means higher demand
Ei = positive
Value varies greatly
Cross elasticity of demand
Exy = Persentage change in quantity demanded of product X divided by percentage change in price of product Y
Understanding of goods
Independent goods
Cross elasticity is zero or near zero
Complementary goods
Cross elasticity is negative
Substitute goods
Cross elasticity of demand is positive
Total Revenue Test
Unit Elasticity
Increase or decrease of price wil not effect TR
Inelastic Demand
Price increase wil increase TR
Price decrease wil reduce TR
Elastic Demand
Price increase wil reduce TR
Price decrease wil increase TR
TR = Product price multiplied by quantity sold
Elasticity of supply
Price elasticity and formula
Mid-point formula
Interpretations of Es
Perfectly elastic supply
Ed = Infinite
Perfectly inelastic supply
Ed = 0
Unit elastic
Es=1
Inelastic supply
Es < 1
Elastic supply
Es > 1
Es =( change in quantity supplied divided by (sum of quantities supplied divided by 2) ) divided by (change in price divided by (sum of prices divided by 2) )
Degree of price elasticity of supply
Impact of time
Immediate market period
Length of time producers are unable to respond to price changes
Long run
Long enough to adjust plant sizes or for new firms to enter.
Short run
Too short to change plant capacity but long enough to use the fixed-sized plant more intensively
Elastic supply
Large change in quantity supplied
Sensitive to price change
Inelastic supply
Small change in quantity supplied
Insensitive to price change
Elasticity of Demand
Price elasticity and formula
Determinants of Price elasticity of demand
Luxuries versus necessities
Proportion of Income
Substitutability
Time
Price elasticity along a Linear demand curve
TR curve
First it slopes upward then reaches a maximum then it slopes downward
demand curve
Straight line
Mid-point formula
Ed =( change in quantity divided by (sum of quantities divided by 2) ) divided by (change in price divided by (sum of prices divided by 2) )
Interpretations of Ed
Inelastic demand
Ed < 1
Elastic demand
Ed > 1
Perfectly elastic demand
Ed = Infinite
Perfectly inelastic demand
Ed = 0
Unit elasticity
Ed = 1
Inelastic demand
Insensitive to price changes
Small change in quantities demanded
Elastic demand
Sensitive to price change
Large change in quantities demanded