CH4 - Elasticity Flashcards
When is a good elastic?
A good is said to be elastic when quantity demanded is quite responsive to changes in price.
When is a good inelastic?
A good is said to be inelastic when quantity demanded is unresponsive to changes in price
What are the effects of a reduction in supply on a good where the demand is elastic?
The effect of reduction supply is a slight rise in price and a large decrease in quantity
What are the effects of a reduction in supply on a good where the demand is inelastic?
The effect of reduction supply is a slight rise in price and a large decrease in quantity
What is the formula for price elasticity of demand?
N = ( % change in Q demanded) / (% change in P)
What is the formula for elasticity of price?
N = ( % change in Q) / (% change in p)
When η<1, demand is
Inelastic
When η>1, demand is
Elastic
When η=1, demand is
Unit elastic
The closer you got to the … axis, elasticity approaches …
The closer you get to the vertical axis, elasticity approaches oo
When demand curve is horizontal, η is equal to what?
η=oo
When demand curve is vertical, η is equal to what
η=0
What determines elasticity of demand?
- Availability of substitutes
Change in price of X w substitutes remaining constant => X will be substituted
Products defined more broadly have more substitutes so more elastic - Importance in consumer’s budget
small fraction = inelastic demands
large fraction = elastic demands - Time period - short vs long run
Inelastic in short run can become elastic over time
What does it mean when something is perfectly inelastic?
Quantity demanded doesnt change as price changes.
Demand curve is vertical
η=0
What does it mean when something is inelastic?
% change in Q demanded is smaller than % change in P
0 < η < 1
What does it mean when something it unit elastic?
The % change in Q demanded is equal to the % change in P
η=1
What does it mean when something is elastic?
% change in Q demanded is larger than the % change in price
η>1
What does it mean when something is perfectly elastic?
Buyers are prepared to buy all they can at the given price.
Demand curve is horizontal
η=oo
What is the formula for total expenditure?
Total expenditure = price x quantity
What effect does a reduction in price and elasticity of price have on total expenditure?
If demand for a product is inelastic, a reduction in price leads to a decline in total expenditure.
If demand for a product is elastic, a reduction in price leads to an increase in total expenditure.
What does a vertical supply curve imply?
Quantity supplied does not change as price changes = supply is inelastic
What does a horizontal supply curve imply
There is an infinite elasticity of supply
What are 2 determinants of elasticity of supply?
- ease of substitution
If the price of a product rises, how much more can firms produce profitably? This depends in part on how easy it is for firms to shift from the production of other products to the one whose price has risen. - short run and long run
It may be difficult to change quantity supplied in response to a price increase in a matter of weeks or months but easy to do so over years.
The long-run supply for a product is more elastic than the short-run supply
When is Price elasticity of Supply perfectly inelastic?
Ns = 0
Q supplied doesnt change as price changes
supply curve is vertical
When is Price elasticity of supply inelastic?
0 < Ns < 1
% change in Q supplied is smaller than the percentage change in price
When is price elasticity of supply unit elastic?
Ns = 1
% change in quantity supplied is = to % change in price
When is price elasticity of supply elastic?
Ns > 1
% change in Q supplied is larger than the % change in price
When is price elasticity of supply perfectly elastic
Ns = infinity
Sellers are prepared to sell all they can at given price
Supply curve is horizontal
What is an excise tax?
Tax on the sale of a particular product
What is tax incidence?
Location of the burden of a tax, that is, the identity of the ultimate bearer of the tax
When do consumers bear most of the burden of excise taxes, and when is it producers?
When demand is inelastic relative to supply, consumers bear most of the burden of excise taxes. When supply is inelastic relative to demand, producers bear most of the burden.
What effect does an increase in wages have on the demand and supply curve?
An increase in wages will shift the demand curve to the right and the supply curve to the left
What do you measure with the income elasticity of demand?
A measure of the responsiveness of quantity demanded to a change in income
What happens to demand for normal goods as income rises?
good for which Q demanded rises as income rises = income elasticity is positive
What happens to demand for inferior goods as income rises?
Good for which q demanded falls as income rises = income elasticity is negative
How do you distinguish necessities from luxuries in terms of elasticity? (normal goods)
Necessities: products for which the income elasticity of demand is positive but less than one
Luxuries: products for which the income elasticity of demand is positive and greater than one
What is the formula for cross elasticity of demand?
Nxy = (%change in Q demanded of good x) / (%change in P of good y)
Is the cross elasticity for complementary products positive or negative?
Negative
When price of one good rises, the quantity demanded of other good falls
Is the cross elasticity for substitute products positive or negative?
Positive
When price of one good rises, Q demanded of other good increases
