Elasticity of Demand

What causes a “change in demand”?

• Change in Income:

1. Normal goods - as income increases, demands increase
2. Inferior goods - as income increases, demand for goods increase

• Elastic demand:
• demand that is sensitive to a change in $$
• A product, not a necessity
• available substitute
• ex: steak, fur coat
• e > 1
• Inelastic demand
• demand that is not sensitive to a change in $$
• product = necessity
• few to no substitutes
• ex: gas, insulin
• e < 1
• Unitary elastic
• e = 1

Step 1: Quantity

• new quantity - old quantity

    old quantity

Step 2: Price

• new $$ - old $$

old $$

Step 3: PED

• % change in quantity

       % change in $$

P x Q = Total revenue

• Total amount of $$ a firm receives from selling goods & services

Marginal Revenue

• Additional income from selling an additional limit
• New Total Cost - Old Total Cost = Marginal Cost

Equilibrium:

The point in which the supply curve intersects with the demand curve

Excess Demand:

occurs when quantity demanded is greater than quantity supplied.

(result in a shortage-consumers can't get the quantities of items that they want )

Price Ceiling:

when the government puts a legal limit on high the price of a product  

(found under the point of equilibrium) Price Ceiling -> creates shortage

Ex: Rent Control

Excess Supply:

occurs when quantity supplied is greater than quantity demanded

(result in a surplus-producers have inventory that they can’t get rid of)

Price floor:

the lowest legal price a commodity can be sold at. (found above the point of equilibrium)

Ex: Minimum Wage