Chapter 4 Flashcards
What is elasticity?
A measure of the responsiveness of buyers and sellers to changes in price or income.
When is demand elastic?
If the quantity demanded changes significantly as a result of price change.
When is demand inelastic?
If the quantity demanded changes a small amount as a result of price change.
What is the price elasticity of demand?
A measure of the responsiveness of quantity demanded to a change in price.
What is the most important determinant of price elasticity?
The existence of substitutes - when there are many substitutes the market shifts in favor of the consumer and prices don’t increase too much - demand is elastic. However, if substitutes aren’t plentiful then prices will increase tremendously as supply decreases - demand is inelastic.
What is the price elasticity of demand formula?
percentage change in the quantity demanded / percentage change in price
What is the midpoint method?
(Change in Quantity Demanded / Average Value of Q) / (Change in Price / Average Value of P)
What does a perfectly inelastic graph look like?
Entirely vertical; slope = 0
What does a relatively inelastic graph look like?
Steep negative slope
What does a relatively elastic graph look like?
Slightly negative slope
What does a perfectly elastic graph look like?
Entirely horizontal; slope = 0.
What is the income elasticity of demand?
A measure of how a change in income affects spending. equation: percentage change in Q(D)/ percentage change in income
What is the price elasticity of supply?
A measure of the responsiveness of the quantity supplied to a change in price.
What are the determinants of the price elasticity of supply?
Time, the adjustment process, the degree of flexibility that producers have in bringing their product to the market quickly.
How do we calculate the price elasticity of supply?
Percentage change in the quantity supplied / percentage change in price
