Chapter 4 Flashcards
Elasticity
Measure of how buyers & sellers respond to change in market conditions
General Elasticity Equation:
(percent change in Q)/(percent change in determinant)
Coefficient of elasticity equation
(percent change quantity)/(percent change price)
Own-Price elasticity of demand (Ep)
Measures how demanded quantity responds when selling price changes
Percent Change =
(After - before)/before
Income elasticity of demand
Measures how quantity demanded responds when income of consumers changes
Cross-price elasticity of demand
Measure of quantity demanded responds when the selling price of another good changes
Income elasticity of demand equation
En = (percent change in quantity demanded)/( percent change in income)
If income elasticity of demand is positive, then…
It’s a normal good
If income elasticity of demand is negative, then…
It’s an inferior good
Cross-price elasticity of demand equation
Ea,b = (percent change in quantity)/(percent change in price of related good)
Price elasticity of supply
Measures how quantity supplies responds when selling price changes
Price elasticity of supply equation
Es = (percent change in quantity supplied)/(percent change in price)
Examples of goods with elastic demand are:
Luxury goods, goods with close substitutes, goods that take a large portion of your budget, narrowly defined goods
Examples of goods with inelastic demand are:
Necessities, goods with no close substitutes, goods that take a small portion of your budget, goods that are broadly defined
Examples of goods with elastic supply are:
Goods whose factors of production are readily available & mobile, goods that can be easily stored, and goods with short & simple production process
Examples of goods with inelastic supply are:
Goods whose factors of production are difficult to obtain & move, goods that can’t be stored easily, and goods that take a long time to produce or have a complicated process
Point elasticity
Measure the impact of a marginal change in price on quantity demanded
Equation for point elasticity
Ep = (dQ/dP)(P/Q)
