econ midterm sample - Elasticity Elasticity measures how much one variable responds to changes in another variable Price elasticity of demand measures

Elasticity Elasticity measures how much one variable responds to changes in another variable. Price elasticity of demand measures how much Q d responds to a change in P . Income elasticity of demand : measures the response of Q d to a change in consumer income For normal goods, income elasticity > 0. For necessities, it is between 0 and 1 For luxury goods, it is greater than 1 For inferior goods, income elasticity < 0. Cross-price elasticity of demand : measures the response of demand for one good to changes in the price of another good Price elasticity of supply measures how much Q s responds to a change in P . x To find the % change for Elasticity, use the midpoint formula Determinants of Price Elasticity x Availability of close substitutes o Breakfast cereal (more) vs. Sunscreen (less) x Necessities vs. luxuries o A Caribbean Cruise (more) vs. Insulin (less) x Definition of the market o Market for blue jeans (more) vs. Market for clothing (less) x Share of consumer’s budget o Restaurant Meals (more) vs. Pens (less) x