Chapter 19: Demand and Supply Elasticity Flashcards
What is elasticity?
measures relative response of a quantity (either supplied or demanded) to change in something else
Midpoint Formula
(new-old)/(new+old/2)
Formula for elasticity
% change in quantity/ % change in something else
Formula elasticity of demand
%change in quantity of demand/ change in price
Elasticity <1
inelastic
Elasticity =1
Unit Elastic
Elasticity >1
elastic
Formula Price elasticity of supply
% change in quantity supplies/ % change in price
More (and better) substitutes
larger share of budget
Longer time
more elastic it is
Fewer (and worse) substitutes
smaller share of budget
shorter time
less elastic it is`
Electricity is
very inelastic
Life-Saving Medicare is
most inelastic
$10 bill is
Most elastic
Banana is
Elastic
Ease of increasing/decreasing quantity supplied
acquisition of new resources or ability to reduce production without incurring large losses. “Flexibility” of producers
If price goes up
quantity demand goes down
Revenue =
Price x Quantity
If something is inelastic
revenue increases
%change in Price> %change in quantity
If something is unit elastic
Revenue is unchanged
%change in price= %change in quantity
If something is elastic
revenue decreases
%change in price< %change in quantity
Expenditure equals
Price x Quantity
Elasticity <0
inferior goods (ex:Ramen, bus fare, generic brands)
Elasticity >=0
normal goods
<= Elasticity <=1
necessity goods (ex: bread, salt, gasoline (short term), eye glasses)
Elasticity >1
Luxuries (ex: artwork, fancy cars, dinner at nice restaurants, name brands)
Income Increases
You: buy fewer inferior goods, buy normal goods, and a bit more necessities, way more luxuries
Income Decreases
You: buy more inferior goods, buy fewer normal goods, a bit less necessities, way less luxuries
Cross Price Elasticity is used to
determine if goods are complements or substitutes
Cross Price means
`“not own price”… the price of other goods
Cross Price Elasticity (XY)
%change in quantity demand of X/ %change in price oy Y
Cross Price Elasticity (YX)
%change in quantity demand of Y/ %change in price of X
When CPE is positive
they are substitutes
P of y goes up, QD of x goes down and QD of y goes up (numerator has to be positive)
When CPE is negative
they are compliments
P of y goes up, QD of y goes down and QD of x goes down (numerator has to be negative)
Cross Price Elasticity Assumes…
that the reason for a price change in the other good changes due to supply shift
Who has the most inelastic demand for airline tickets?
a) A business traveler who needs to get across the country to make a deal this week
b) a student planning a spring break trip in January
c) a mother planning on taking her family somewhere for a vacation
A business traveler who needs to get across the country to make a deal this week
Use the midpoint formula to find the percentage change between a value of 300 and 400
29%
What is the price elasticity of demand if a 10% increase in price leads to a 2% reduction in quantity demand?
0.2%
Which Supply curve is most elastic
a) Day Laborers
b) Semi-Truck drivers
c) Lawyers
d) Doctors
e) High school teachers
Day Laborers
A 10 percent increase in the price of sugar reduces sugar consumption by about 5 percent. The increase causes households to
a) Spend more on sugar
b) Spend less on sugar
c) Spend the same on sugar
d) Consume more goods like coffee and tea that are complements of sugar
Spend more on sugar
What is the formula for every elasticity?
a) Δ quantity demanded / Δ price
b) %Δ quantity / %Δ price
c) %Δ price / Δ quantity
d) %Δ quantity / %Δ something else
e) %Δ something else / %Δ quantity
%Δ quantity / %Δ something else
How do you know if a good is an inferior good?
a) Income elasticity is greater than one
b) Income elasticity is less than zero
c) Price elasticity of demand is negative
d) Price elasticity of supply is less than one
income elasticity is less than zero
