CH6: Elasticity Flashcards
What is price elasticity of demand?
PED measures the responsiveness of quantity demand to a change in price.
What is the formula for PED?
Percentage change in quantity demand/ percentage change in price
Elastic demand
when a change in price leads to higher percentage change in demand
Inelastic demand
when a change in price leads to a lower percentage change in demand
What is total revenue?
total amount the seller receives from the selling a product
relation between elastic demand and revenue
If revenue and price move in the opposite direction, they are elastic.
relation between inelastic demand and revenue
if revenue and price movie in same direction, they are inelastic.
Relation between revenue and unit elastic
if revenue does not change with price, it’s unit elastic.
What are the factors that affect price elasticity of demand?
Substitution
Proportion of income
necessity/luxuries
time
What are the factors that affect price elasticity of supply?
immediate market period
short run
long run
What is cross elasticity of demand?
measures the responsiveness of percentage change in quantity demand of one good to a percentage change in price of another good
What does a positive coefficient indicate?
It indicates substitute goods
What does a negative coefficient indicate?
It indicates complementary goods
What is income elasticity of demand?
it measures the responsiveness of quantity demand to a change in income.
what does a positive coefficient indicate?
It indicates normal goods
