LECTURE 4 6.

what are the key determinant of price elasticity of

demand and how it affects it?
1. what is elasticity?
1. availability of close substitutes
-A measure of how much one economic variable
responds to changes in another economic variable -more substitutes

-have more elastic demand

2. what is price elasticity of demand?

-The responsiveness of the quantity demanded to a 2. passage of time

change in price
-more time passes to adjust their buying habit

-have more elastic demand

-because have more time to find substitutes

3. luxuries vs necessities
-price elasticity of demand =/ slope of demand curve
-luxuries goods =more elastic demand, have more
substitutes

3. what is characteristic of elastic and inelastic demand? -necessities = less elastic

elastic inelastic -if price fall, consumer will likely buy at lower price
condition Demand> price Price>demand
Absolute value >1 <1
Increase in price TR falls TR rises 4. definition of market
curve flatter steeper
-narrowly defined market (very specific) market

-have more elastic demand

4. what is characteristic of unit-elastic?
-have more substitutes
-absolute value = 1

-if price increase, TR unchanged

5. share of a good in a consumer’s budget

-product that capture large portion in budget

5. what is characteristic of perfectly elastic and perfectly
inelastic? -have more elastic demand

P. elastic P. Inelastic

condition Demand> price Price>demand 7. why elastic demand will decrease the revenue when
price increase?
Absolute value infinity 0
- the decrease in quantity demanded is proportionally
curve horizontal vertical greater than the increase in price.

8. why inelastic demand will increase the revenue when

price increase?
- the decrease in quantity demanded is proportionally
smaller than the increase in price.
12. predict changes in price using price elasticity of
supply.

9. why elasticity is not constant along a linear demand elastic inelastic

curve?
condition Demand> price Price>demand
-as move down the demand curve, price elasticity of
demand declines Absolute value >1 <1

-at higher prices, demand is elastic and revenue rises Increase in price less more
until max is..

-at lower prices, demand is inelastic and revenue falls curve flatter steeper

10. what is cross-price elasticity of demand?

- The percentage change in quantity demanded of one

good divided by the percentage change in the price of
another good.

11. what is income elasticity of demand?

- A measure of the responsiveness of quantity

demanded to changes in income.