Ch.4 Elasticity Flashcards
Measure of
how much △Qty Demanded
as a result of
△Price
Price Elasticity of Demand
(+ / unitless)
When
Coefficient of Elasticity
ε < 1
InElastic Demand
Qty Demanded is
NOT responsive to △Price
e.g. utility/car repair/egg/
appliance/tobacco
Graphic :
Steep
When
Coefficient of Elasticity
ε > 1
Elastic Demand
Qty Demanded is
responsive to △Price
e.g. tomato/movies/cars
Graphic :
Shallow (flatter)
When
Coefficient of Elasticity
ε = 1
Unitary Demand
% of △Qty Demanded
= % of △Price
Graphic :
Rectangular Parabola
Determinants of
Price Elasticity
- # of Substitutes
- % of income spent
-
Time period involved
Time↑ ⇒ ε↑ - Sustainability
Calculation of
ε
Coefficient of Elasticity
. % of △Qty Demanded
ε = |———————————|
. % of △Price
= |(△QD/avgQD) / (△P/avgP)|
Explain & Classify
when ε = |-0.3|
For every 1% change in Price
there will be a
0.3% difference in
Qty Demanded
in the Opposite Direction
& classified as InElastic (ε<1)
The Point on
Demand Curve
which has
Max Total Revenue
Equilibrium Price
(Above Eq. ⇒ Elastic
Below Eq. ⇒ InElastic)
When Price ↑
Total Rev of
Elastic Demand &
InElastic Demand
Elastic (ε >1) $ ↑
⇒ TR ↓
InElastic (ε <1) $ ↑
⇒ TR ↑
e.g. Harvest (supply) ↑
⇒ $ ↓ ⇒ TR ↓
|Slope| of Demand Curve
is Steep / Shallow
InElastic / Elastic
Graph of
Perfect InElastic
vs
Perfect Elastic
Perfect InElastic |
Perfect Elastic —
InElastic Demand ↑
% of Tax
Paid by Cx ↑ or ↓?
% of Tax Paid by Cx ↑
2 Reasons Gov impose Sin Tax
- ↓ Production / Consumption
- Easy Tax Revenue
∵ Tax InElastic
⇒ Price ↑ > Qty ↓
Elasticity of Supply
εₛ
Elasticity of Supply
. % of △Qty Supplied
εₛ = ——————————
. % of △Price
= (△Qₛ/avgQD) / (△P/avgP)
Responsiveness of Qty supplied
to change in $
Determinant of $ for
Perfectly InElastic Supply
e.g. concert tickets
Demand
(demand curve)
