5. Elasticity Flashcards
elasticity
a measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants
Mankiw, N. (2023). Principles of Economics (second edition, 93-116). Macmillan Learning Inc.
price elasticity of demand
how much the quantity demanded of a good responds to a change in the price of that good, computed as the % change in quantity demanded divided by the % change in price
Mankiw, N. (2023). Principles of Economics (second edition, 93-116). Macmillan Learning Inc.
demand is elastic if…
responds substantially to changes in the price
Mankiw, N. (2023). Principles of Economics (second edition, 93-116). Macmillan Learning Inc.
demand is inelastic if…
responds only slightly to changes in the price
Mankiw, N. (2023). Principles of Economics (second edition, 93-116). Macmillan Learning Inc.
what determines the price elasticity of demand?
- necessities vs luxuries
- availability of close substitutes
- definition of the market
- time horizon
Mankiw, N. (2023). Principles of Economics (second edition, 93-116). Macmillan Learning Inc.
- necessities vs. luxuries
Generally,
necessities = inelastic demands
luxeries = elastic demands
Mankiw, N. (2023). Principles of Economics (second edition, 93-116). Macmillan Learning Inc.
- availability of close substitutes
goods with close substitutes = more elastic demand bc it is easier for consumers to switch
Mankiw, N. (2023). Principles of Economics (second edition, 93-116). Macmillan Learning Inc.
- time horizen
more elastic demand over longer time
Mankiw, N. (2023). Principles of Economics (second edition, 93-116). Macmillan Learning Inc.
- definition of the market
elasticity depends on the boundaries of the market ie.
narrowly defined markets = more elastic bc it is easier to find substitutes (ice cream)
broadly defined markets = harder to find substitutes (food)
Mankiw, N. (2023). Principles of Economics (second edition, 93-116). Macmillan Learning Inc.
computing the price elasticity of demand
the % change in the quantity demanded divided by the % change in the price
page 95
Mankiw, N. (2023). Principles of Economics (second edition, 93-116). Macmillan Learning Inc.
price elasticity of demand is sometimes reported as negative #’s
if one of the %s reflects a decrease
page 96
Mankiw, N. (2023). Principles of Economics (second edition, 93-116). Macmillan Learning Inc.
why use the midpoint method?
bc calculating the price elasticity of demand btw 2 points… the elasticity from pt. A to pt.B seems different from the elasticity from pt. B to pt. A
Mankiw, N. (2023). Principles of Economics (second edition, 93-116). Macmillan Learning Inc.
the midpoint method
computes a % change by dividing the change by the midpoint of the initial and final levels.
gives same answer regardless of directional change
used when calculating the price elasticity btwn 2 points
page 96
Mankiw, N. (2023). Principles of Economics (second edition, 93-116). Macmillan Learning Inc.
the variety of demand curves
elastic is elasticity >1, (quantity moves proportionately more than price)
inelastic is elasticity <1, (quantity moves proportionately less than the price)
if elasticity = 1, demand is said to have unit elasticity
if elasticity = 0, demand is perfectly inelastic, extreme cases
if elasticity approaches infinity, demand is perfectly elastic
Mankiw, N. (2023). Principles of Economics (second edition, 93-116). Macmillan Learning Inc.
total revenue
amount paid by buyers and sellers of a good, computed as the price of the good times the quantity sold
Mankiw, N. (2023). Principles of Economics (second edition, 93-116). Macmillan Learning Inc.
inelastic demand curve, <1
price increase, raises total revenue
price decrease, reduces total revenue
Mankiw, N. (2023). Principles of Economics (second edition, 93-116). Macmillan Learning Inc.
elastic demand curve, >1
price increase, reduces total revenue
price decrease, raises total revenue
Mankiw, N. (2023). Principles of Economics (second edition, 93-116). Macmillan Learning Inc.
unit elastic demand, =1
a change in the price does not affect total revenue
Mankiw, N. (2023). Principles of Economics (second edition, 93-116). Macmillan Learning Inc.
“rise” over “run”
rise = price
run = quantity
Mankiw, N. (2023). Principles of Economics (second edition, 93-116). Macmillan Learning Inc.
a linear demand curve
the slope of a linear demand curve is constant, but its elasticity is not
page 101, great graph
Mankiw, N. (2023). Principles of Economics (second edition, 93-116). Macmillan Learning Inc.
income elasticity of demand
measure how the quantity demanded changes as consumer income changes
% change in quantity demanded divided by the % change in income
Mankiw, N. (2023). Principles of Economics (second edition, 93-116). Macmillan Learning Inc.
cross-price elasticity of demand
measure how the quantity demanded of one good changes as the price of another good changes
% change in quantity demanded of the first good divided by the % change in the price of the second good
Mankiw, N. (2023). Principles of Economics (second edition, 93-116). Macmillan Learning Inc.
price elasticity of supply
measures how much the quantity supplied responds to changes in price
% change in quantity supplied divided by the % change in price
Mankiw, N. (2023). Principles of Economics (second edition, 93-116). Macmillan Learning Inc.
the variety of supply curves
perfectly inelastic = 0
perfectly elastic = infinity
elastic = >1
inelastic = <1
Mankiw, N. (2023). Principles of Economics (second edition, 93-116). Macmillan Learning Inc.
order of operations
- does the supply curve or demand curve shift?
- if so, which direction?
- use the supply & demand diagram to see how the market equilibrium changes.
Mankiw, N. (2023). Principles of Economics (second edition, 93-116). Macmillan Learning Inc.
hybrid wheat example
no single farmer would choose to leave his land fallow on his own bc each takes the market as given. but if all farmers do so together, each of them can be better off.
Mankiw, N. (2023). Principles of Economics (second edition, 93-116). Macmillan Learning Inc.
OPEC example
the short-term supply and demand curves are steep
the long-term supply and demand curves are more elastic
raising prices is easier in the short term than the long run
Mankiw, N. (2023). Principles of Economics (second edition, 93-116). Macmillan Learning Inc.
drug interdiction example
increase drug-related crime in the short run while decreasing it in the long run
Mankiw, N. (2023). Principles of Economics (second edition, 93-116). Macmillan Learning Inc.
