3) CH5 Elasticity and its applications Flashcards
What is elasticity?
It is measure of how much buyers and sellers respond to changes in market conditions.
It is a quantitative approach.
What is the price elasticity of demand?
It is a measure of how much the quantity demanded of a good responds to a change in the price of that good.
% change in quantity D divided by the % change in price.
What are the determinants for the price elasticity of D?
- Availability of close substitutes
- Necessities vs luxuries
- Definition of the market
- Time horizon
When does the price elasticty of D tends to be more elastic?
- Large number of close substitutes
- If the good is a luxury one
- The more narrowly defined the market
- The longer the time period
How do you compute the price elasticity of D?
How do you compute bthe elasticity with the midpoint method?
When is the price inelastic to D?
- Quantity D does not respond strongly to price changes
- Price elasticity of D is less than 1
When is p elastic to D?
- Q D responds strongly to changes in price
- P elasticity of D is greater than 1
When is the price perfectly inelastic?
Q D does not respond to P changes.
When is price perfectly elastic?
Q D changes infintely with any change in price
When is the price unit elastic?
Q D changes by the same % as the price.
To which mathematical indicator is the P elasticity of D related?
The slope of the D curve.
What is the total revenue?
How do you compute it?
Amount paid by buyers and received by sellers of a good.
TR = P*Q
What happens to the total revenue when there is a increase of price and the D is inelastic.
This leads to a descreas in Q, proportionnely smaller, thus, the TR increases.
What happens to the total revenue when there is an increase of price and the D is ealstic?
There is a decrease of Q, proportionely larger, the TR decreases.
What is Income elasticity of D?
Measure of how much the Q D for a good responds to a change in consumer’s income.
% of the Q D divided by the % change in I.
What is the formula of D elasticity of I?
What happens to necessity goods, looking at the D elasticity of I?
Luxury goods?
They tend to be inelastic.
They tend to be elastic.
What is the price elasticity of supply?
Measure of how much the quantity supplied for a good responds to a change in the p of that good.
% change in Q S resulting from 1 % change in price.
Price elasticity of supply: inelastic
Price elasticity of supply: less than 1
Price elasticity of supply: equals 1
Price elasticity of supply: gretaer than 1
Price elasticity of supply: elasticity equals infinity
What are the determinants of p elasticity of D?
- Ability of sellers to change the amount of the good they produce
- Time period (S is more price elastic in the long-term).
What are the three steps to analyze an elasticity?
- Examine wether the S or D curve shifts
- Determine the direction of the shift of the curve
- Use the S & D diagram to see how the market Equilibrium changes.
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