chapter 3 Flashcards
The elasticity is
a measure of responsiveness of the quantity demanded or the quantity supplied to one of its determinants.
The price elasticity of demand
measures how much the quantity demanded of a good responds to a 1% change in the price of that good.
point elasticity
The price elasticity of demand in one particular point. for a very small change ∆ in price
Price elasticity of demand
- 0: Demand is perfectly inelastic
- Between 0 and -1: Demand is price inelastic,
- -1: Demand is price unitary elastic,
- Between -1 and -∞: Demand is price elastic,
- -∞: Demand is perfectly elastic
Total expenditure is
the amount paid by buyers, computed as the price of the good times the quantity purchased.
Determinants of the price elasticity of demand
- Availability of close substitutes
- Definition of the market
- Necessities versus luxuries
- Proportion of income devoted to the product
- Time horizon
The income elasticity of demand measures
how much quantity demanded of a good responds to a change in consumers’ income. It is the percentage change in quantity demanded QD divided by the percentage change in income R.
The cross-price elasticity of demand is
a measure of how much the quantity demanded of a good responds to a change in the price of another good.
The price elasticity of supply measures
how much the quantity supplied of a good responds to a 1% change in the price of that good.
Price elasticity of supply
- 0: Supply is perfectly inelastic
- Between 0 and 1: Supply is price inelastic
- 1: Supply is price unitary elastic
- Between 1 and +∞: Supply is price elastic
- +∞: Supply is perfectly elastic
Determinants of the price elasticity of supply
- Productive capacity
- The time period
- The mobility of factors of production
- Ease of storing stock/inventory
