Chapter 4 Flashcards
What is Elasticity of demand?
Measures how sensitive quantity demanded is to a change in price.
E.g. if price of hamburger increases people will be less inclined to buy them, if price decreases people more inclined to buy them.
Inelastic demand
When the quantity is insensitive to the change in price.
E.g. When the price goes down you buy A LITTLE BIT more, when the price goes up you buy a little bit less. - insensitive to a change in price.
Why is Gasoline inelastic?
Because there is very few substitutes. Very few alternatives for gasoline to put into your car. Gasoline is also a necessity and it has an elasticity coefficient that is less than one.
What is the Elasticity of Demand Coefficient formula?
% Change in quantity / % Change in price
If the number is less than one it is inelastic
How do you determine whether something is elastic?
When a product has many substitutes, or they’re luxuries, or they have an elasticity coefficient greater than one. A big change in quantity as a result of a small change in price.
What is unit elastic demand?
% Change in quantity = % Change in price
Coefficient = 1
What is perfectly inelastic?
When the demand curve is a vertical straight line. An increase in price has no effect on quantity.
What is perfectly elastic?
When the demand curve is a horizontal straight line. A firm cannot change the price at all, if they change the price no one is going to buy. so the elasticity coefficient is infinite.
The more substitutes a product has and the more sensitive it is to a change in price, the ___________
the greater the elasticity of demand coefficient
Total revenue =
Price x Quantity
If something is inelastic, what happens to the price and total revenue?
When the price goes up, so does the TR when the price goes down so does the TR.
If something is elastic, what happens to the price and total revenue?
When the price goes up, the TR goes down
When the price goes down, the TR goes up
