3: Elasticity and its Applications Flashcards
if demand is inelastic, when the price rises
the demand decreases proportionally less so the total revenue increases
elastic demand is for what type of goods? (two points)
non essential product with many satisfactory substitutes
Who holds the power in inelastic and elastic markets respectively?
inelastic: supplier, elastic: consumers
what type of goods have an inelastic demand curve?
essential goods with no satisfactory substitutes
how to calculate elasticity
%change in quantity demanded/%change in price
the %change is the new demand/price divided by the mean of the old and new demand/price
if elasticity is
it is an inelastic demand
if elasticity > 1
demand is elastic
If demand is elastic, an increase in price leads to
a proportionally larger decrease in demand so total revenue decreases
if elasticity is 2, a 10% increase in price will lead to
a 20% decrease in quantity demanded
What is the cross price elasticity of demand?
The responsiveness of quantity demanded to a given change of price in another good (which is complementary or a substitute)
%change in demand of X/%change price of Y, where %change is the difference divided by the avg of the new and old values.
if the cross elasticity is positive then the two products must be
substitutes
for complements, the cross elasticity is always
negative
a perfectly inelastic supply is
a vertical line; any price has the same supply
elastic supply is
an increase in price leads to a proportionally larger increase in quantity supplied
income elasticity of demand is
the responsiveness of quantity demanded of a good to changes in income
an increase in income leads to a larger demand of what kind of goods in richer countries? what kind of good has less change in richer countries?
durable goods and services demand increases; basic needs and clothing demand do not increase as much
calculate the income elasticity of demand
change in demand/change in income
what goods have positive income elasticities of demand, and which have negative
normal goods have positive, inferior have negative
when income is too low, the income elasticity is
0
at very high income, what happens to the income elasticity of ceiling fans?
becomes negative as the ceiling fan becomes an inferior good (versus a/c)
what is the effect of the government setting a price ceiling lower than the equilibrium price?
leads to a shortage as suppliers sell less as demand increases. Shortage can lead to the black market, paying more for the short supply goods
a price ceiling above equilibrium point will
have no effect on the market
What is the effect of a price floor higher than the equilibrium point?
A surplus
What is the effect of a price floor below the equilibrium point?
no effect
What happens to market equilibrium when a tax is imposed?
cost of production increases so the supply curve shifts up and the equilibrium point moves left up (less quantity and higher price)
who is liable to pay tax?
the seller
who ends up paying the tax?
both the consumer and the seller
who pays more of the tax?
inelastic demand: buyer pays more, elastic: seller pays more (due to market power)
effects of shifts in supply curve for inelastic and elastic demands
inelastic: large effect on price, small effect on quantity; elastic: small effect on price, large effect on price
what type of good has more total tax?
inelastic goods
calculating percentage change in quantity
change in quantity/the mean of the old and new quantities
delta Q / (Q1 + Q2) / 2
