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.
