Chapter 4 Flashcards
Price elasticity of demand
The units-free measure of of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buying plans remain the same.
Formula for price elasticity of demand
Price elasticity of demand = ∆Qd / ∆P
Perfectly inelastic demand
If the Qd remains constant when the price changes
Unit elastic demand
If the percentage change in the quantity demanded equals the percentage change in the price.
Inelastic demand
The percentage change in Qd is less than the percentage change in the price.
Perfectly elastic demand
If the Qd changes by an infinitely large percentage in response to a tiny price change.
Elastic demand
If the % ∆Qd exceeds the % ∆P
The elasticity of demand depends on:
- The closeness of substitutes
- The proportion of income spent on the good
- The time elapsed since the price change
Total revenue
Total price of a good multiplied by the quantity sold.
Total revenue test.
A method of estimating the price elasticity of demand by observing the change in the price, when all other influences on the quantity sold remain the same.
Price cuts and elasticity and what they imply of demand elasticity
- Price cut increases total revenue: demand is elastic
- Price cut decreases total revenue: demand is inelastic
- Price cut leaves total revenue unchanged: demand is unit elastic
Income elasticity of demand
A measure of the responsiveness of the demand for a good or service to a change in income, ceteris paribus.
Income elasticity of demand formula:
Income elasticity of demand = % ∆Qd / % ∆Income
Income elasticity ranges:
> 1 : normal good, income elastic
0 < > 1: normal good, income inelastic
<0: inferior good
Cross elasticity of demand
A measure of the responsiveness of the demand for a good to a change in the price of a substitute or complement, ceteris paribus.
Cross elasticity of demand formula:
Cross elasticity of demand = % ∆Qd / (% ∆Price of substitute or complement)
Cross elasticity ranges:
Positive: prices change in the same direction: substitutes
Negative: prices change in the opposite direction: complements
Elasticity of supply
Measures the responsiveness of the quantity supplied to a change in the price of a good, ceteris paribus.
Elasticity of supply formula:
Elasticity of supply = % ∆Qs / % ∆P
The elasticity of a good depends on:
- Resource substitution possibilities
- Time frame for the supply decision
3 distinguished time frames of supply:
- Momentary supply
- Short-run supply
- Long-run supply
Momentary supply
The immediate response of the quantity supplied when the price of a good changes.
Short-run supply
The response of the quantity supplied to a price change when only some of the possible adjustments to production can be made.
Long-run supply
The response of the quantity supplied to a price change after all the technologically possible ways of adjusting supply have been exploited.
