Chapter 3: ELASTICITY Flashcards
A concept in economics that measures responsiveness of one variable to changes in another variable
elasticity
When an increase in price reduces the quantity demanded by a lot (and vice versa); when the elasticity of demand is more than one, |Ed| > 1
elastic
When the elasticity of demand is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in price
elastic demand
When the elasticity of supply is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in price
elastic supply
When the same increase in price reduces the quantity demanded just a little; when the elasticity of demand is less than one, |Ed| < 1
inelastic
When the elasticity of demand is less than one, indicating that a 1 percent increase in price paid by the consumer leads to less than a 1 percent change in purchases (and vice versa); this indicates a low responsiveness by consumers to price changes
inelastic demand
When the elasticity of supply is less than one, indicating that a 1 percent increase in price paid to the firm will result in a less than 1 percent increase in production by the firm; this indicates a low responsiveness of the firm to price increases (and vice versa if prices drop)
inelastic supply
When there are so many substitutes that even with a small increase in price, demand stops
perfectly elastic demand
The number of units demanded does not depend on price at all
perfectly inelastic demand
The percentage change in quantity demanded divided by the percentage change in price
price elasticity of demand
When the elasticity of demand equals one, |Ed| = 1
unit elastic
When the calculated elasticity is equal to one indicating that a change in the price of the good or service results in a proportional change in the quantity demanded or supplied
unitary elasticity
Using the average percent change in both quantity and price to calculate elasticity along a demand or supply curve
the midpoint method
Manner in which the tax burden is divided between buyers and sellers
tax incidence
When price increases, revenue on units sold increases
the price effect
When price increases, fewer units are sold
the quantity effect
The per-unit price multiplied by the number of units sold; (TR) = Price (P) x Quantity Demanded (Q)
total revenue
The quantity supplied can be expanded by a lot in response to small price changes
perfectly elastic supply
No matter what the selling price is, the quantity supplied does not change
perfectly inelastic supply
The percent change in quantity supplied divided by the percent change in price
price elasticity of supply
When a given percent change in price leads to an equal percentage change in quantity demanded or supplied
constant unitary elasticity
The Midpoint Method
Q2-Q1 / (Q2+Q1 / 2) X 100 divided by P2-P1 / (P2+P1 / 2) X 100
Price Elasticity of Demand
% change in quantity demanded / % change in price
Price Elasticity of Supply
% change in Qs / % change in price
Cross Price Elasticity of Demand
% change in Qd of good A / % change in price of good B
Two different brands of soda would have ________ cross-price elasticities of demand. (negative or positive)
positive (substitute goods)
Tennis balls and tennis rackets would have
_______ cross-price elasticities of demand. (negative or positive)
negative (complement goods)
Income Elasticity of Demand
% change in Qd / % change in income
income-elastic goods, meaning if a buyer’s income increases by 1%, their quantity demanded of these goods goes up by more than 1%.
luxury goods
income-inelastic goods, meaning if a buyer’s income increases by 1%, their quantity demanded of these goods still goes up, but it goes up by less than 1%.
necessity goods
Elasticity of Labor Supply
% change in Q of labor supplied / % change in wage
Wage Elasticity of Labor Supply
% change in hours worked / % change in wage
Elasticity of Savings
% change in Q of Financial Savings / % change in interest rate
