Chapter 5

Chapter 5 discusses how buyers and sellers react to changes in economic variables, which is the concept of elasticity. The price elasticity of demand is calculated by the percent change in quantity demanded divided by the percent change in price. If the elasticity is less than one, the demand is known as inelastic. If the elasticity is greater than one, the demand is known as elastic. The determinants of price elasticity of demand include the availability of close substitutes, necessities vs. luxuries, time horizon, and markets (narrowly vs. broadly defined).  The cross-price elasticity of demand measures how the quantity demanded of one item reacts to the price of another item. Total revenue is the amount paid for a good and equals the quantity sold multiplied by the price. In inelastic demand curves, total revenue rises as the price rises, which shows a positive relationship. In elastic demand curves, total revenues falls as the price rises, which shows a negative relationship. The price elasticity of supply is calculated by the percent change in quantity supplied divided by the percent change in price. The equations for price elasticity of demand and price elasticity of supply are extremely similar. The determinants of the price elasticity of supply include the flexibility of sellers and the time horizon. When the elasticity is equal to zero, the supply is perfectly inelastic and is shown on the graph as a vertical line. When the elasticity is infinite, the supply is perfectly elastic and is a horizontal line.