2.4 Elasticities of Demand and Supply Flashcards
_ is a measure of the sensitivity of one variable to another.
Elasticity
_ tells us the percentage change in one variable in response to a one percent change in another variable.
Elasticity
_ is the measure of the responsiveness of demand for a commodity to changes in any of its determinants, such as the price of the commodity, price of related goods, and consumers’ income.
Elasticity of demand
Accordingly, there are three basic elasticities:
I. Price elasticity of demand,
II. Cross-price elasticity of demand &
III. Income elasticity of demand
_ is a measure of the degree of responsiveness (or sensitiveness) of consumers to changes in the price of the commodity itself.
Price elasticity of demand
_ is the ratio of the percentage change in quantity demanded to the percentage change in price.
Price elasticity of demand
Economists measure the degree of elasticity or inelasticity by the elasticity coefficient ( E^D P ), which is given by:
Price elasticity = _ or _
Proportionate change in quantity demanded / Proportionate change in price
or
Percentage change in quantity demanded / Percentage change in price
Price elasticity of demand is of two types: _
Point elasticity and arc elasticity of demand.
_ measures elasticity at a (given) point or for a very small change in price.
Point elasticity of demand
Symbolically, we could write point elasticity of demand as:
Point elasticity = Change in Q / Quantity/Change in P / Price
or
Change in Q / Change in P multiplied by P / Q
_ refers to price elasticity over a distance on the demand curve.
Arc elasticity of demand
_ measures the average responsiveness of consumer demand to changes in price over a range of extended prices.
Arc elasticity of demand
Symbolically, we could write arc elasticity of demand:
%change in Q / &change in P = Change in Q (P1+P2) / Change in P (Q1+Q2)
From the down sloping demand curve, we know that price and quantity demanded are _ related.
inversely
Because of the down sloping demand curve , the price elasticity coefficient of demand, Ed, will always be a _ number.
negative
T/F
We usually ignore the minus sign and simply present the absolute value of the elasticity coefficient to avoid any ambiguity that might otherwise arise.
True
Demand is said to be _ if a specific percentage change in price results in a larger percentage change in quantity demanded.
elastic
In elastic demand, E^D P will be _.
greater than one
Demand is said to be _ if a given percentage change in price is accompanied by a relatively smaller change in the quantity of the good or service.
Inelastic
In inelastic demand, E^D P is _.
less than 1
Demand is said to be _ if a percentage change in price and the accompanying percentage change in quantity demand are equal.
unitary elastic
In unitary elastic, E^D P is _
1
Demand is said to be _ if the quantity demanded of a certain
product is invariable relative to the change in the price.
Perfectly inelastic
In perfectly inelastic, E^D P is _
0
Demand is said to be _ if it denotes that a 1% change in price results in an infinite change in quantity demanded.
perfectly elastic
_ shows that a change in the price of a good or service does not bring about in any change in the quantity demanded
Perfectly inelastic
In _, the consumer can buy all possible quantities at the given price and nothing else at other prices.
Perfectly elastic
The case separating elastic and inelastic demands is said to be _.
unitary elastic
In _ %change in Q is greater than %change in P
Elastic demand
In _ %change in Q is equal to %change in P.
Unitary elastic
In _ %change in Q is less than %change in P
Inelastic demand
In _ %change in Q is 0.
Perfectly inelastic
In _ %change in Q is infinity.
Perfectly elastic
The elasticity of demand depends on the following factors:
- Nature of the commodity
- Availability of close substitutes
- People with high incomes are less affected by price changes than people with low incomes.
- Proportion of income spent on the commodity
- Urgency of demand / postponement of purchase
- Durability of a commodity
- Product purchase frequency or recurrence of demand
- Time
The demand for necessities is _ because the demand does not change much with a change in price.
inelastic
The demand for luxuries is _ in nature.
elastic
The commodity that has the greatest number of substitutes has relatively _ demand.
elastic
A commodity with fewer substitutes has relatively _ demand.
inelastic
People with _ incomes are less affected by price changes than people with _ incomes.
high, low
T/F
When a small part of income is spent on the commodity, the price change affects the demand.
False, it does not
