Chapter 4 Flashcards
When is demand elastic?
It is elastic when the quantity demanded is quite responsive to changes in price
When is demand inelastic?
When the quantity demand is relatively unresponsive to changes in price
What can be observed the more demand becomes elastic?
The more elastic demand, the less the change in equilibrium price and the greater the change in equilibrium quantity resulting from any given shift in the supply curve
When demand is elastic, who has power?
The consumer
When demand is inelastic, who has power?
The producer
What is the equation for the price elasticity of demand of both point and arc (η)?
η = percentage change in quantity demanded / percentage change in price
or
η = ((Demand - Quantity demanded) / Average quantity demanded) / ((Demand - Price) / Average price)
What kind of slope does a demand curve have and what does this do to the percentage changes in price and quantity?
The demand curve has a negative slope so the percentage changes in price and quantity have opposite signs
Do we make demand elasticity a negative number or a positive number?
We make demand elasticity a positive number even though it is a negative number by ignoring the negative sign
Does a negatively sloped linear demand curve have constant elasticity?
No, it only has a constant slope
How does the demand curve for perfectly inelastic demand look like?
It looks like a vertical line
How does the demand curve for perfectly elastic demand look like?
It looks like a horizontal line
How does the demand curve for unit elastic demand look like?
Like a decreasing curved line (think a c but with a straight line at the top)
What do products with close substitutes tend to have?
They tend to have elastic demands
What do products with no close substitutes tend to have?
They tend to have inelastic demands
What do narrowly defined products have more of than more broadly defined products?
They have more elastic demands
What do products that represent a small fraction of consumers’ budgets tend to have?
They tend to have inelastic demand because they are products that do not affect the budget of the given consumer greatly as a daily expense
What do products that represent a large fraction of consumers’ budgets tend to have?
They tend to have elastic demand
What is the general result of products that represent a small fraction of consumers’ budgets tending to have inelastic demand and products that represent a large fraction of consumers’ budgets tending to have elastic demand?
There is higher price elasticity for more expensive items
The longer the time span, the more ___ is the price elasticity of demand
elastic
What does a short-run demand curve show?
It shows the immediate response of quantity demanded to a change in price
What does a long-run demand curve show?
It shows the response of quantity demanded to a change in price after enough time has passed to develop or switch to substitute products
What is the equation for Total Expenditure?
Total Expenditure = Price x Quantity
How does total expenditure change when the price changes?
When price falls, quantity demanded increases
When price increases, quantity demanded decreases
What does the change in total expenditure depend on?
It depends on price elasticity of demand
What happens to total expenditure when demand is elastic and price falls?
The quantity change dominates and total expenditure rises
What happens to total expenditure when demand is inelastic and price falls?
The price changes dominates and total expenditure falls
What happens to total expenditure when demand is unit elastic and price falls ?
The percentage change in quantity demanded equals the percentage change in price and total expenditure remains unchanged
What happens to total expenditure when demand is elastic and price increases?
The quantity change dominates and total expenditure decreases
What happens to total expenditure when demand is inelastic and price increases?
The price change dominates and total expenditure increases
What happens to total expenditure when demand is unit elastic and price increases?
The percentage change in quantity demanded equals the percentage change in price and total expenditure remains unchanged
What is price elasticity of supply a measure of?
It is a measure of the responsiveness of quantity supplied to a change in the product’s own price
When is supply elastic?
When quantity supplied is quite responsive to changes in price
When is supply inelastic?
When quantity supply is relatively unresponsive to changes in price
What is the equation of Price Elasticity of Supply?
ηs = Percentage change in quantity supplied / percentage change in price
ηs = (ΔDQs/Average Qs) / (ΔDP/ Average P)
What is ease of substitution?
It is the ease with which a product can be substituted by the customer which is directly related to its value
If the price of a product rises, how much more can be produced profitably depends on how easy it is for producers to shift from the production of other products to the one whose price has risen.
The easier it is to shift from the other products to the one whose price has risen, the more elastic the supply is.
What does the short-run supply curve show?
It shows the immediate response of quantity supplied to a change in price given producer’s current capacity to produce one good
What does the long-run supply curve show?
It shows the response of quantity supplied to a change in price after enough time has passed to allow producers to adjust their productive capacity
The shorter the time span the harder it is to ____ away from one production to get into another
substitute
What is the excise tax?
It is a tax on the sale of a particular product
What does the excise tax do to consumers and producers respectively
The excise tax raises the price paid by consumers but reduces the price received by producers
What determines the amount of the excise tax?
The difference between the price paid by the consumer and the price received by the seller
What is the burden of the excise tax dependent on?
It is dependent on the relative elasticities of supply and demand
The more inelastic labour supply is, the ____ is the burden of the payroll tax on workers
higher
What is the equation for income elasticity of demand
ny= percentage change in quantity demanded / percentage change in income
If ny > 0, then the good is a(n) ___ good
normal
If ny < 0, then the good is a(n) ___ good
inferior
What are normal goods?
They are a good that experiences an increase in its demand due to a rise in consumers’ income
For normal goods: If income elasticity is positive but less than one then ___
demand is income inelastic
For normal goods: If income elasticity is positive but greater than one then ___
demand is income elastic
What do we call products for which the income elasticity of demand is positive but less than 1?
Necessities
What do we call products for which the income elasticity of demand is positive but greater than 1?
Luxuries
The more ___ an item is in the consumption pattern of consumers, the ___ is its income elasticity
necessary
lower
What are inferior goods?
They are goods that have a negative income elasticity because an increase in income actually leads to a reduction in quantity demanded
What is the equation for cross price elasticity of demand
nxy = percentage change in quantity demanded of good x / percentage change in price of good y
What does the change in the price of good y cause to the demand curve for good x?
It causes it to shift
If x and y are substitutes what happens?
An increase in the price of y leads to an increase in demand for x so the demand curve for x shifts rightward
If x and y are complements what happens?
An increase in the price of y leads to a decrease in the demand for x so the demand curve for x shifts leftward
