When price falls and TR is unchanged demand is unit elastic o When price falls

When price falls and tr is unchanged demand is unit

This preview shows page 8 - 10 out of 10 pages.

When price falls and TR is unchanged, demand is unit elastic o When price falls and TR declines, demand is inelastic Determinants of Price Elasticity of Demand 1. Substitutability The larger the number of substitute goods, the greater the price elasticity of demand With more substitutes available, consumers have more alternative options When there is a change in price, there is a greater percentage change in quantity demanded, making the demand more elastic. The broader the market for the product, the more elastic the demand. The narrower the mark for the product, demand is more inelastic. 2. Proportion of Income The greater the proportion of income needed to buy the good the more elastic the demand Consumers will be more sensitive to changes in prices because the price change can result in thousands of dollars difference 3. Luxuries vs. Necessities Demand is very elastic because luxuries are things people can go without Consumers will change the amount they purchase by a greater amount even if the price changes by a small amount. 4. Time It takes time to alter the amount being purchased, so the more time available, the more elastic the demand. Ex: A person doing their Christmas shopping on Christmas Eve has a very inelastic demand because they doesn’t have the time to look around for alternative purchases Applications of Price Elasticity of Demand o Large Crop Yields Highly inelastic; lower total revenue When the supply rises it tends to depress both the prices of farm products and the total revenues (incomes) of the farmers Large crop yields are undesirable o Excise Taxes Inelastic demand, higher total revenue Elastic demand, less total revenue o Decriminalization of Illegal Drugs Legalizing drugs would allegedly reduce drug trafficking Inelastic demand, higher total revenue Price Elasticity of Supply If the quantity supplied by producers is relatively responsive to price changes, supply is elastic. If not, it is inelastic. How to measure the degree of elasticity o E s = % change in quantity supplied % change in price of product
Image of page 8
o E s > 1 supply is elastic o E s < 1 supply is inelastic Price Elasticity of Supply depends on how easily producers can shift resources between alternative uses Price Elasticity of Supply: The Market Period o Market Period- The period that occurs when the time immediately after a change in market price it too short for producers to respond with a change in quantity supplied Means that there is no time to adjust output in response to a price change There is no time to adjust to a price change, making the supply perfectly inelastic. Example: Farmer’s Market on a Saturday, cannot adjust supply With a perfectly inelastic supply, the increase in demand does not change the quantity at all. Price Elasticity of Supply o The Short Run There is enough time to adjust output by increasing or decreasing the variable inputs but not the fixed inputs Example: On a farm, can’t change size of land and machinery, but can change the amount of labor Supply is more elastic than in the market period, resulting in a smaller increase in price but also an increase in quantity
Image of page 9
Image of page 10

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture