04 Elasticity Flashcards
Price elasticity of demand
The percentage change in quantity demanded from a 1% change in price
If price elasticity is greater than 1..
Demand is elastic (percentage change in quantity is greater than percentage change in price, demand is responsive to price)
Formula for Elasticity
E = percentage change in quantity demanded / percentage change in price
If price elasticity is less than 1..
Demand is inelastic (percentage change in quantity is less than percentage change in price, quantity demanded is not very responsive to price)
If price elasticity is 1..
Demand is unit elastic (price and quantity change by the same percentage)
Determinant of price elasticity of demand (sub..)
Substitution options (more options, more elastic)
Determinant of price elasticity of demand (budg..)
Budget share (large share, more elastic)
Determinant of price elasticity of demand (time..)
Long time to adjust, more elastic
Formula at a given point (graph)
E = P/Q x 1/slope
When two demand curves cross..
At common point demand is less price elastic for steeper curve
The more substitutes a good has..
The higher the price elasticity of demand will be as consumers can readily switch to or away from them if their price changes
Perfectly inelastic demand
The quantity demanded does not change when price changes (zero price elasticity along vertical demand)
The price elasticity of supply
Percentage change in quantity supplied from a 1 percent change in price.
(P/Q) x (1/slope)
Income elasticity of demand for a good..
Is the percentage by which quantity demanded changes in response to a one percent change in income.
Perfectly elastic demand
The price does not change when the quantity demanded changes (infinite price elasticity along horizontal line)
Total expenditure
= total revenue (price x quantity)
Cross price elasticity of demand
The percentage change in quantity demanded of good A from a 1 percent change in the price of good B (shows relationship between the goods)
Complements
Have negative cross-price elasticity (an increase in price of one will lead to decrease in demand of other)
Substitutes
Have positive cross-price elasticity (increase in price of one will lead to increase in demand of other)
If supply curve has a positive intercept…
Price elasticity of supply decreases as Q increases
If supply curve has a zero intercept..
Price elasticity of supply is 1.00
Determinant of price elasticity of supply (inp..)
Input flexibility (uses adaptable inputs, more elastic)
Determinant of price elasticity of supply (mob..)
Mobility of inputs (resources move where needed, more elastic)
Determinant of price elasticity of supply (prod..)
Produce substitute inputs (alternative inputs easy to find, more elastic)
Determinant of price elasticity of supply (time..)
Time (long run, more elastic)
Total revenue…
Is highest when demand is unit elastic (when price elasticity of demand = 1)
An increase in total revenue occurs…
If an increase in price leads to a relative small percentage drop in quantity demanded (that is, if demand is inelastic)
Total revenues increase when..
Price increases if demand is inelastic with respect to price.
If there are few substitutes for a good..
Quantity demanded will then change very little in response to a change in price
Income elasticity of demand will be negative..
If an increase in income leads to a decrease in demand (or decrease in income leads to increase in demand)
When consumers have more time to adapt to a price change..
The change in quantity demanded will be higher, implying that the price elasticity of demand will be higher in long run than short run
Along a linear demand curve..
Slope is constant and as price increases (quantity falls) P/Q will rise and increase elasticity of demand
Along a straight-line demand curve..
The price elasticity of demand at the midpoint is always equal to one.
Goods that account…
For a small share of a person’s budget have a lower price elasticity of demand than do goods that account for a large share of a person’s budget.
