Chapter 4 Flashcards
What is “Elasticity”?
Elasticity is a measure of the responsiveness of buyers and sellers to changes in price or income.
- Allows us to measure how much consumers and producers change their behaviour when prices or income changes
What is the “price elasticity of demand”?
The price elasticity of demand measure the responsiveness of quantity demanded to a change in price.
What are the factors that affect the “Price Elasticity of Demand”?
- Existence of Substitutes
- The Share of the Budget Spent on the Good
- Necessities v Luxury Goods
- Whether the market is broadly or narrowly defined
- Time and Adjustment process
What is the formula for the “Price Elasticity of Demand”?
What is the formula for “Price Elasticity of Demand” (midpoint method)?
How does the curve look like at each stage of elasticity?
What are the different values at each stage of elasticity of demand?
What is “Unitary Elasticity”?
Unitary Elasticity describes the situation in which elasticity is neither elastic nor inelastic
Does slope equal elasticity? Why/Why not?
The price elasticity of demand along the demand curve is not constant.
As you progress downwards along the demand curve, price becomes less of an inhibiting factor, and the price elasticity of demand slowly becomes more inelastic
What is “Total Revenue” and how is it calculated?
- Total Revenue is the amount that a firm receives from the sale of goods and services
- Price of a good x Amount sold
What happens to total revenue when goods are elastic and price is decreased?
Decreasing price will increase total revenue
What happens to total revenue when goods are inelastic and price is increased?
Increasing the price of the good will increase total revenue.
What happens to total revenue when the demand for the good is unitary and price is increased?
No effect on total revenue
What is “income elasticity” and how is it calculated?
Income Elasticity measures how a change in income affects spending.
What are the different values at each stage of income elasticity?
What is “cross-price elasticity” and how is it calculated?
Cross-price elasticity of demand measure the responsiveness of the quantity demanded of one good to a change in the price of a related good.
What are the different values at each stage of cross-price elasticity?
CAN (Complements are Negative)
What is the “Price Elasticity of Supply” and how is it calculated?
The Price Elasticity of Supply is a measure of the responsiveness of the quantity supplied to a change in price.
What are the different values at each stage of the elasticity of supply?
