Chapter 4 Flashcards
Another term for elasticity
Responsiveness
The price elasticity of demand is
measured as the percentage change in quantity
demanded, divided by the percentage change in price.
ed =
Percentage change in quantity demanded/
Percentage change in price
For demand elasticity is always __, and for supply is ___
Negative
Positive
For linear demand curve how do we determine elasticity
The best convention is to use the midpoint of the price values and the corresponding midpoint of
the quantity values
Average quantity Q = (Q1+Q2)/2
Average price P = (P1+P2)/2
ed =
((Q2−Q1)/Qmean)/
((P2−P1)/Pmean)
Point elasticity formula
Ed= dQ/dP (first derivative) * (P/Qd)
what is arc elasticity
defines consumer responsiveness over
a segment or arc of the demand curve.
In linear graph, is elasticity stays the same?
No, it changes along the graph
At high prices elasticity is ___ and at low prices the elasticity is ___
Large
Small
What does it mean if the demand quantity curve vs price is vertical
no quantity change results from a change in price from P1 to P2 -> elasticity is zero
What does it mean if the demand quantity curve vs price is horizontal
elasticity is infinite, any percentage price
change brings forth an infinite quantity change!
What happens with elasticity at vertical and horizontal intercept
with an extremely large value in the denominator of the elasticity
expression, that whole expression is tending towards a zero value.-> when p=0, horizontal intercept
By the same reasoning the
elasticity value at the vertical intercept is tending towards an infinitely large value., when q=0, horizontal intercept
When demand is elastic and inelastic, unit elasticity?
Demand is Elastic
when the price elasticity (ignoring the negative sign) is > -1
Demand is Inelastic
when the price elasticity lies between -1 and 0
Demand is Unit Elastic
when the price elasticity is exactly one
Determinants of price elasticity: Why is it that the price elasticities for some goods and services are high and for others low?
- Tastes
- Ease of substitution (Apple for Samsung)
- Products that are in the same group (pollaroids and photos)
- Time dimension
Total expenditure on the good is the highest at
The midpoint of the demand curve
A rule for price, demand and revenue
A price decline (quantity increase) on an elastic segment of a demand curve necessarily
increases revenue, and a price increase (quantity decline) on an inelastic segment
also increases revenue. The price should be where the demand elasticity is unity
Why are price floors frequently
found in agricultural markets?
The answer is that governments believe that the pressures of competition
would force farm/food prices so low that many farmers would not be able to earn a reasonable
income from farming
Short run vs long run elasticity
In the short run, consumers may not be able (or ready) to adjust their pattern of expenditure
If price changes persist, consumers are more likely to adjust
Demand thus tends to be
more elastic in the long run
but relatively inelastic in the short run
You decide yourself what is short run and what is long run
What is the cross-price elasticity of demand
the percentage change in the quantity demanded
of a product divided by the percentage change in the price of another.
ed(x,y) = percentage change in quantity demanded of x/ percentage change in price of good y = %DeltaQx/ %DeltaPy
Cross-sectional elasticity and interpretation of its different values
E=0-> goods are independent
E-positive, x and y are substituents, if y increase, the demand for x increase as well
E-negative, x and y are complementary goods, the price for one increase, the demand for second one decrease
Total revenue formula
P*Q
Elasticity of luxuries vs necessities
All other factors held constant, luxuries exhibit elastic demands
All other factors held constant, necessities exhibit inelastic demands
How to find total revenue/expenditure for the graph
Area under the curve of x=Q and P=y
What is elastic range and inelastic range of linear demand curve
Upper than the midpoint ->elastic range (revenue from new sales will exceed the fall in revenue from existing sales- total revenue will rise)
Lower than midpoint-> inelastic (revenue from new sales will be less than the fall in the revenue from existing sales- total revenue will fall
The semicircle graph what is y and what is x
x-quantity
y- total revenue-> P*Q
What is the income elasticity
The income elasticity of demand is the percentage change in quantity demanded divided by a percentage change in income
(eta)d = percentage change in quantity demanded/ percentage change in income = %DeltaQ %DeltaI
Usually income elasticity is ___
Negative
Normal good vs inferior good
normal good, because the demand for it
increases in response to income increases. If the demand curve were to shift back to the left in
response to an increase in income, then the income elasticity would be negative. In such cases the
goods or services are inferior. Inferior goods are those for which there exist higher-quality, more expensive, substitutes
Inferior goods have ____ income elasticity
Negativ e
What is the elasticity of supply
The elasticity of supply measures the responsiveness of quantity supplied to a change
in the price.
es = percentage change in quantity supplied percentage change in price = %DeltaQ/ %DeltaP
Elasticity for supply is usually ___
Positive
Vertical and horizontal curves and elasticity for supply
“flatter” supply curves have a greater elasticity than more “vertical” curves at a given price
and quantity combination
S elasticity going to zero, when vertical, meaning that even higher price will not change in quantity supplied
S->infinity (horizontal), even a small change in price will induce large quantity increase
When we calculate the price elasticity of demand of one good we use the price change of that good relative to ___
The inflation rate
When we take into account inflation, we have higher elasticity in terms of absolute value
How do we calculate price elasticity relative to the inflation rate
We use real price change delta P (nomianl)- inflation rate= delta P accounted for inflation
And how e=%delta Q/%delta P accounted for inflation
P=c+dQ
Give the general formula for elasticity
E= 1/d ( inverse of the first derivative)* P/Q
Elasticity is very important for
Determining the impact of a government’s taxation
Valorem and specific type of taxes
specific type (a fixed dollar levy per unit sold) ad valorem type (a percentage levy)
Tax incidence describes
how the burden of a tax is shared between buyer and seller.
The incidence of the tax depends upon ___
The demand elasticity
How from the graph shift of demand and supply curves due to taxation to determine how much the company will get
If from equilibrium you do a projection to the old supply Q , you will get, how much will the company get
The more elastic the supply curve , ____ is the incidence of the tax on the buyer
greater
The more inelastic the supply curve, ___ the incidence on the supplier
The greater
Tax increase /decrease on government tax revenue
Suppose that at the initial tax-inclusive price demand is inelastic (vertical). We
know immediately that a tax rate increase that increases the price must increase total expenditure.
Hence the outcome is that the government will get a higher share of an increased total expenditure.
In contrast, if demand is elastic (horizontal) at the initial tax-inclusive price a tax rate increase that leads to a
higher price will decrease total expenditure. In this case the government will get a larger share of
a smaller pie – not as valuable from a tax-revenue standpoint as a larger share of a larger pie.
Between what prices is demand elastic?
Midpoint and higher the graph
