Key Terms
Example
Wage goes from $10 to $12. % change = 2 / 10 = 0.20 = 20%
Formula
[(Q2 - Q1) / Q1] / [(P2 - P1) / P1] Easier math. Less accurate.
Result
In the short run, supply or demand shocks cause larger price swings and smaller quantity changes. In the long run, price
Common mistake
Treating slope and elasticity as the same thing. They are not.
Short run
Consumers can't easily change habits or infrastructure. Producers can't quickly build capacity.
Elasticity
The responsiveness of one variable to a change in another variable
Price elasticity of demand
% change in quantity demanded / % change in price
Price elasticity of supply
% change in quantity supplied / % change in price
Elastic demand
Absolute value of elasticity greater than 1; quantity responds more than price
Inelastic demand
Absolute value of elasticity less than 1; quantity responds less than price
Unitary elasticity
Elasticity equals 1; quantity and price change by the same percentage
Midpoint method
Uses average of two quantities and average of two prices as the base for percentage calculations; more accurate than poi
Point elasticity
Uses initial values as the base; easier math; slight less accurate
Total revenue
TR = Price x Quantity Demanded
Tax incidence
How the burden of a tax is distributed between buyers and sellers