chapter 2 from class: elasticity Flashcards
what does elasticity measure?
how much one variable responds to changes in another variable
what is elasticity?
a numerical measure of the responsiveness of Qd or Qs to one of its determinants
price elasticity
measures how much Qd responds to a change in P
how is the price elasticity measured considering we have two points given or that we can find (arc elasticity)
(percentage change in quantity demanded) / (percentage change in price)
= ((ππΈπ«)/πΈπ« )/(ππ·/π·)
= ((ππΈπ«)/ππ·) * (π·/πΈπ«)
ππΈπ« is the change in Q
ππ· is a change in price
π· is the midpoint price
πΈπ« is the midpoint quantity demanded
(ππΈπ«)/πΈπ« ) is the percentage change of quantity demanded
(ππ·/π·) is the percentage change in price
how to measure point elasticity of price elasticity of demand?
((ππΈπ«)/ππ·) * (π·/πΈπ«)
(ππΈπ«)/ππ·) is the slope of the Demand curve
π· is the price at that point
πΈπ« is the quantity demanded at that point
what is the difference between arc elasticity and point elasticity?
point elasticity has only one point given (which is the equilibrium) and the slope of the curve
arc elasticity only gives you the midpoint as point and you needs two points to find the slope
midpoint method to calculate percentage changes? why us this instead?
imagine you go from point A to point B, the elasticity wonβt be the same to a scenario where you went from point B to point A
so we instead use the midpoint method
((end value β start value) / (midpoint))
- 100%
midpoint: number halfway between the start & end values, the average of those values
what does the price elasticity of demand depend on?
the extent to which close substitutes are available
whether the good is a necessity or a luxury
how broadly or narrowly the good is defined
the time horizon β elasticity is higher in the long run than the short run
true or false
The price elasticity of demand is closely related to the slope of the demand curve
true
The flatter the curve, the bigger the elasticity or the smaller the elasticity?
the bigger the elasticity
The steeper the curve, the bigger the elasticity or the smaller the elasticity?
he smaller the elasticity
perfectly inelastic demand
price elasticity of demand = 0
demand curve is perfectly vertical
Consumersβ price sensitivity: none
inelastic demand
price elasticity of demand < 1
demand curve is relatively steep
Consumersβ price sensitivity: relatively low
unit elastic demand
price elasticity of demand = 1
demand curve is intermediate slope
Consumersβ price sensitivity: intermediate
elastic demand
price elasticity of demand > 1
demand curve is relatively flat
Consumersβ price sensitivity: relatively high
perfectly elastic demand
price elasticity of demand = infinity
demand curve is horizontal
Consumersβ price sensitivity: extreme
is the elasticity as constant as a curves slope?
nah boy
it will change along the slope
higher on top of demand curve
lower at bottom of demand curve
how to find parameters a, b, c, and d based on the know parameters of Es, Ed, P, and Q
Demand: Qd = a - bP
Supply: Qs = c + dP
d: slope for supply
- b: slope for demand
Ed = -b(P/Q*)
Es = d(P/Q*)
what does the price elasticity of supply measure?
measures how much Qs responds to a change in P
it measures sellersβ price-sensitivity
how to calculate price elasticity of supply?
(Percentage change in Qs) /(Percentage change in P)
= ((ππΈπΊ)/πΈπΊ )/(ππ·/π·)
= ((ππΈπΊ)/(ππ·))*(π·/πΈπΊ)
true or false
The slope of the supply curve is closely related to price elasticity of supply
true
The flatter the curve, the bigger the elasticity or smaller the elasticity
the bigger
The steeper the curve, the bigger the elasticity or smaller the elasticity
the smaller
perfectly inelastic supply
price elastic of supply = 0
supply curve is vertical
sellers price sensitivity: none
inelastic supply
price elastic of supply < 0
supply curve is relatively steep
sellers price sensitivity: relatively low
unit elastic
price elastic of supply = 1
supply curve has an intermediate slope
sellers price sensitivity: intermediate
elastic
price elastic of supply > 1
supply curve is relatively flat
sellers price sensitivity: relatively high
perfectly elastic
price elastic of supply = infinity
supply curve is horizontal
sellers price sensitivity: extreme
why does supply elasticity lower the higher you go up the supply curve?
due to capacity limits
income elasticity of demand
measures the response of Qd to a change in consumer income
Percent change in Qd)/Percent change in income
what type of good if income elasticity is > 0
normal good
what type of good if income elasticity is > 1
luxury good
what type of good if income elasticity is > 0 but < 1
necessity
what type of good if income elasticity is < 0
inferior good
Cross-price elasticity of demand
measures the response of demand for one good to changes in the price of another good
(% change in Qd for good 1)/(% change in price of good 2)
cross price elasticity for substitute goods
cross-price elasticity > 0
an increase in price of beef causes an increase in demand for chicken
cross price elasticity for complement goods
cross-price elasticity < 0
an increase in price of computers causes decrease in demand for software
when demand is inelastic, will an increase in price decrease or increase revenue?
increase revenue
