Microeconomics

Microeconomics

1. Perfectly elastic

   • A horizontal demand curve is said to be perfectly elastic and price elasticity equals infinity
   • Perfect inelastic
     • If price is equal to 0
     • Changes in the price will have no effect on demand
     • Demand is said to be perfectly inelastic ED=0 and the demand curve is a vertical line

2. Elasticity of demand

   • Cross elasticity of demand
     • Impact of changes in the price of other products on the quantity of the product demanded
   • Income elasticity of demand
     • Impacts of changes in household income on the quantity of products demanded
   • Price elasticity of demand
     • Impacts of changes in the price of the products on the quantity of a product demanded
   • Income elasticity of demand formula
     • EY= % change in quantity % change in income
     • Percentage change formula
       • % change = new - original / original ) X 100%

3. Elasticity formula

   • ED= change in Q / quantity X (Price / change in price)
   • Price elasticity and total revenue
     • Price elasticity of demand is linked with the concept of total revenue of business firms and total expenditure of households
     • Total revenue= price X quantity

4. Normal goods

   • Has a positive income elasticity (EY>0
   • Income rises, demand increases
   • income elastic goods are often luxury goods (ED >1)
   • Income inelastic (0
   • Price discrimination
     • Different consumer groups have a different price elasticity of demand and firms can use this information to change their products prices Increases total revenue
   • Inferior goods
     • Negative income elasticity (Ey<0) As income increases, demand falls
     • Substitute Goods
       • Positive cross elasticity E.g. butter and margarine. If the price of butter rises, the demand for margarine will increase
     • Complementary Goods
       • Negative cross elasticity. E.g. cars and petrol. A rise in the price of cars, will cause the demand for petrol to decrease

5. When d is elastic

   • Price and total revenue move in opposite directions E.g. rise in price decreases total revenue
   • When demand is inelastic
     • Price and total revenue move in the same direction E.g. rise in price causes a rise in total revenue
   • When demand is unitary elastic
     • A change in price does NOT change total revenue

6. Non price factors affecting demand

   • Level of disposable income The price of a related good Taste and preference Expectation of consumers Demographic factors
   • Non price factors affecting supply
     • Cost of production Technology Price of a related good Number of sellers Expectation of producers
   • Factors affecting price elasticity of demand
     • Availability of substitutes Greater number of close substitutes, the more price elastic it’s demand is
     • Whether the good is a necessity or a luxury Necessities are relatively price inelastic because they are needed and have few substitutes Luxury goods aren’t necessities therefore price elastic
     • The proportion of income spent Expensive goods are likely to be relatively price elastic because they take up a larger proportion of a consumer’s income or budget Cheaper, inexpensive items on the other hand, will be relatively price inelastic
     • Determinant of supply elasticity
       • Time If the producer can respond quickly to a price then supply will be price elastic
       • Nature if the Industry The supply of agriculture products tends to be relatively price inelastic , while the supply of manufactured goods is more price elasticity

7. Price elasticity of supply

   • Impact of changes in the price of the product on the quantity of a product supplied to a market

8. Ed=1

   • Demand is unitary elastic Price and quantity change in exactly the same proportion
   • Ed>1
     • Demand is price elastic Buyers are sensitive to a price change The law of demand is relatively strong
   • Ed= infinity
     • Demand is said to be perfectly elastic Price elasticity would equal infinity
   • Ed=0
     • Demand is said to be perfectly inelastic Price change will have NO effect on quantity demanded
   • Ed<1
     • Hey demand is inelastic Buyers are NOT sensitive to a price change The law of demand is relatively WEAK