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Test 2 Review - Review Chapter 5 6 13 Chapter 5 Elasticity...

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Review Chapter 5, 6, 13
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Chapter 5: Elasticity Basic idea: Elasticity measures how much one variable responds to changes in another variable. Price elasticity of demand = Percentage change in Qd Percentage change in P Price elasticity of supply = Percentage change in Qs Percentage change in P
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Midpoint Method: end value – start value midpoint x 100%
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E L A S T C Y N D S P O 4 Calculating Percentage Changes Using the midpoint method, the % change in P equals $250 – $200 $225 x 100% = 22.2% § The % change in Q equals 12 – 8 10 x 100% = 40.0% § The price elasticity of demand equals 40/22.2 = 1.8
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E L A S T C Y N D S P O 5 The Determinants of Price Elasticity: A Summary The price elasticity of demand depends on: the extent to which close substitutes are available whether the good is a necessity or a luxury how broadly or narrowly the good is defined the time horizon – elasticity is higher in the long run than the short run
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E L A S T C Y N D S P O 6
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E L A S T C Y N D S P O 7 If demand is elastic, Increase price, revenue falls Decrease price, revenue increases If demand is inelastic, Increase price, revenue increases Decrease price, revenue falls
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E L A S T C Y N D S P O 8 Other Elasticities
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