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Microeconomics > Chapter 4 > Flashcards

Chapter 4 Flashcards

1
Q

Another term for elasticity

A

Responsiveness

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2
Q

The price elasticity of demand is

A

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

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3
Q

For demand elasticity is always __, and for supply is ___

A

Negative

Positive

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4
Q

For linear demand curve how do we determine elasticity

A

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)

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5
Q

Point elasticity formula

A

Ed= dQ/dP (first derivative) * (P/Qd)

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6
Q

what is arc elasticity

A

defines consumer responsiveness over

a segment or arc of the demand curve.

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7
Q

In linear graph, is elasticity stays the same?

A

No, it changes along the graph

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8
Q

At high prices elasticity is ___ and at low prices the elasticity is ___

A

Large

Small

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9
Q

What does it mean if the demand quantity curve vs price is vertical

A

no quantity change results from a change in price from P1 to P2 -> elasticity is zero

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10
Q

What does it mean if the demand quantity curve vs price is horizontal

A

elasticity is infinite, any percentage price

change brings forth an infinite quantity change!

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11
Q

What happens with elasticity at vertical and horizontal intercept

A

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

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12
Q

When demand is elastic and inelastic, unit elasticity?

A

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

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13
Q

Determinants of price elasticity: Why is it that the price elasticities for some goods and services are high and for others low?

A
  • Tastes
  • Ease of substitution (Apple for Samsung)
  • Products that are in the same group (pollaroids and photos)
  • Time dimension
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14
Q

Total expenditure on the good is the highest at

A

The midpoint of the demand curve

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15
Q

A rule for price, demand and revenue

A

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

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16
Q

Why are price floors frequently

found in agricultural markets?

A

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

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17
Q

Short run vs long run elasticity

A

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

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18
Q

What is the cross-price elasticity of demand

A

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
19
Q

Cross-sectional elasticity and interpretation of its different values

A

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

20
Q

Total revenue formula

A

P*Q

21
Q

Elasticity of luxuries vs necessities

A

All other factors held constant, luxuries exhibit elastic demands

All other factors held constant, necessities exhibit inelastic demands

22
Q

How to find total revenue/expenditure for the graph

A

Area under the curve of x=Q and P=y

23
Q

What is elastic range and inelastic range of linear demand curve

A

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

24
Q

The semicircle graph what is y and what is x

A

x-quantity

y- total revenue-> P*Q

25
Q

What is the income elasticity

A

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
26
Q

Usually income elasticity is ___

A

Negative

27
Q

Normal good vs inferior good

A

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

28
Q

Inferior goods have ____ income elasticity

A

Negativ e

29
Q

What is the elasticity of supply

A

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
30
Q

Elasticity for supply is usually ___

A

Positive

31
Q

Vertical and horizontal curves and elasticity for supply

A

“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

32
Q

When we calculate the price elasticity of demand of one good we use the price change of that good relative to ___

A

The inflation rate

When we take into account inflation, we have higher elasticity in terms of absolute value

33
Q

How do we calculate price elasticity relative to the inflation rate

A 
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

34
Q

P=c+dQ

Give the general formula for elasticity

A

E= 1/d ( inverse of the first derivative)* P/Q

35
Q

Elasticity is very important for

A

Determining the impact of a government’s taxation

36
Q

Valorem and specific type of taxes

A 
specific type (a fixed dollar levy per unit sold)
ad valorem type (a percentage levy)
37
Q

Tax incidence describes

A

how the burden of a tax is shared between buyer and seller.

38
Q

The incidence of the tax depends upon ___

A

The demand elasticity

39
Q

How from the graph shift of demand and supply curves due to taxation to determine how much the company will get

A

If from equilibrium you do a projection to the old supply Q , you will get, how much will the company get

40
Q

The more elastic the supply curve , ____ is the incidence of the tax on the buyer

A

greater

41
Q

The more inelastic the supply curve, ___ the incidence on the supplier

A

The greater

42
Q

Tax increase /decrease on government tax revenue

A

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.

43
Q

Between what prices is demand elastic?

A

Midpoint and higher the graph

Microeconomics (10 decks)

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