# Economics CFA

 Price elasticity of demand a units-free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buyers' plans remain the same Price elasticity of demand = % change in quantity demanded / % change in price ... use absolute value so ignore the minus sign% change in quantity demanded = (Orginal quant. - New quant.) / average of old and new quant. % change in price = (Orginal price - New Price) / average of old and new price Elasticity is a units-free measure because the % change in each variable is independent of the units in which the variable is measured. The ratio of the 2 %s is a # without units. Perfectly inelastic demand Quantity demanded is constant regardless of the price changes. The price elasticity of demand is 0. ex of good: low price elasticity of demand = insulin. Unit elastic demand if the % change in the quantity demanded equals the % change in price, then price elasticity = 1 and the good is said to have a unit elastic demand. Inelastic demand % change in the quantity demanded is less than the percentage change in price (price elasticity is between 0 and 1) perfect elastic demand if the quantity demanded changes by an infinitely large % in response to a tiny price change, then the price elasticity of demand is infinityex: soft drink machine located side by side elestic demand if % change in quantity demanded exceeds % change in price, the price elasticity of demand is greater than 1 and the good is said to have an elastic demand. The change in total revenue depends on the elasticity of demand in the following ways: - If demand is elastic: 1% price cut increases quantity sold by more than 1% & total rev. increase - If demand is inelastic: 1% price cut increases quantity sold by less than 1% & total rev. decrease- If demand is unit elastic: 1% price cut increases quantity sold by 1% & total rev. doesn't change total revenue test is a method of estimating the price elasticity of demand by observing the change in total rev. that results from a change in the price, when all other influences on the quantitiy sold remain same - price cut ^ total rev. demand = elastic- price cut decrease total rev. demand = inelastic- price cut leave total rev. unchange, demand = unit elastic magnitude of the elasticity of demand depends on - the closness of substitutes- the proportion of income spent on the good = higher % of income a good cost the more elastic the demand- the time elapsed since a price change = the more time that has passed the more elastic the demand Cross Elasticity of Demand Measures the influence of a change in price of a subsitute or complement. Measure of the responsiveness of the demand for a good to a change in the rpice of a substitute or complement, other things remainig same - cross elasticity of demand = % change in quantity demanded / % change in price of a substitute or complement - positive for a substitute and negative for a complement - the larger the cross elasticity of demand the greater the change in demand and the larger the shift in the demand curve - if two items are not related then the cross elasticity is 0. Income Elasticity of Demand Responsiveness of the demand for a good or service to a change in income, other things remaining the same. - income elasticity of demand = % change in quantity demanded / % change in income - Greater than 1 (normal good, income elastic) = as income ^, % of income spent on good ^- Positive and less than 1 ( normal good, income inelastic) = as income ^, % of income spent on good decreases - Negative (inferior good) = as income ^, % of income spent on good decreases Elasticity of Supply Measures the responsiveness of the quantity supplied to a change in the price of a good when all the other influences on selling plans remain the same - Elasticity of supply = % change in quantity supplied / % change in price - No matter how steep the supply curve is , if it is linear and pases through the origin, supply is unit elastic Magnitude of the elasticity of supply depends on - Resource substitution possibilities = when good is produced in many countires or can be obtained easily then it is highly elastic. - Time frame for the supply decision > momentary supply (response of quantitiy supplied immediately following price change) > long-run supply (response of quantitiy supplied to a change in price after all the technologically possible ways of adjusting supply have been exploited) > short-run supply (the quantity supplied responds to a price change when only some of the technologically possible adjustments to production have been made) producers can control quantitiy supplied quickly Authorbrundhak ID32771 Card SetEconomics CFA DescriptionReading 13 - Elasticity Updated2010-09-05T00:22:54Z Show Answers