CH5: Elasticity Flashcards
How does elasticity affect total revenue?
Total Revenue (TR) = Price (P) × Quantity (Q). / If demand is inelastic, a price increase increases total revenue. / If demand is elastic, a price decrease increases total revenue.
What is elasticity in economics?
Elasticity measures the sensitivity of one economic variable to a change in another, such as how demand responds to price changes.
What is price elasticity of demand and how is it calculated?
It measures the percentage change in quantity demanded when the price changes by 1%, ceteris paribus. / ep = (% change in quantity demanded) / (% change in price).
What is the formula for elasticity and what does it represent?
Elasticity = % change in dependent variable / % change in independent variable.
What paradox occurs when farmers increase production?
Increased supply may lead to lower prices and reduced total income despite higher output.
concept
Explanation
elastic demand
A price change leads to a proportionally greater change in quantity demanded (elasticity > 1). Lowering price increases total revenue.
give an example of price elasticity calculation.
If price changes by 5% and quantity demanded changes by 10%, ep = 10% / 5% = 2.
perfectly elastic demand
Elasticity coefficient is infinity. Consumers will buy any quantity at a certain price, but quantity demanded drops to zero if price increases.
what does ep < 1 imply?
Demand is inelastic – quantity changes less than price.
what does ep = 1 imply?
Demand is unit elastic – quantity and price change proportionally.
what does ep > 1 imply?
Demand is elastic – quantity demanded changes more than price.
what is arc elasticity?
It calculates elasticity over a range using the average of starting and ending prices and quantities.
what is inelastic demand?
ep < 1 – Quantity demanded changes less than proportionately to price.
what is perfectly inelastic demand?
ep = 0 – Quantity demanded does not change regardless of price.
what is point elasticity?
Elasticity calculated at a specific point on the demand curve.
what is the formula for arc elasticity?
ep = ((Q2 - Q1) / (Q1 + Q2)) / ((P2 - P1) / (P1 + P2)).
what is the impact of a steeper demand curve on elasticity?
A steeper demand curve means less responsive demand and greater price changes.
what is the shape of a perfectly inelastic demand curve?
Vertical line – quantity remains constant despite price changes.
what is the shape of a unitarily elastic demand curve?
Rectangular hyperbola (not a straight line).
what is unitary elasticity?
ep = 1 – Quantity and price change in equal proportions.
