chapter 4 Flashcards
1
Q
types of elasticity
A
- price elasticity of demand
- price elasticity of supply
- income elasticity
- cross price elasticity
2
Q
price elasticity of demand
A
- measure of how much the quantity demanded of a good responds to a change in price
- elastic when Qd responds strongly to a change in price and inelastic when Qd responds weakly to a change in price
3
Q
determinants of the price elasticity of demand
A
- substitution possibilities: elasticity high if its easy to sub between products
- importance of product in consumer’s budget: items that take up a larger share have higher elasticity
- time (short and long run): substitution takes time so elasticity higher in the long run
4
Q
price elasticity coefficient
A
- uses percentages so it’s a unit free measure, compares responsiveness cross products
- eliminate negative so its easier to compare
5
Q
possible elasticity cases
A
- elastic: >1
- perfectly inelastic when n=infinity
- inelastic: <1
- perfectly elastic when n=0
- unitary elastic: 1
6
Q
elasticity along a linear curve
A
- negatively sloped linear demand curve has a constant slope but not constant elasticity
7
Q
elasticity and the effect of a price change on total expenditure
A
- n>1: price increase causes a reduction in TE, reduction causes an increase
- n=1: price change causes no changes in TE
- n<1: price increase causes an increase in TE, reduction cases a reduction in TE
8
Q
price elasticity of supply (Ns)
A
- measure of the responsiveness of quantity supplied to a change in the product’s price
9
Q
determinants of supply elasticity
A
- amount of time producers have to respond to a change in price
- with time ease of substitution increases - increase in elasticity
- how much more can be produced profitably depends on how easily producers can shift from the production to the one whose price has risen
10
Q
excise tax
A
- a tax on the sale of a particular product
11
Q
excise tax and elasticity
A
- when demand is inelastic burden is on consumers
- when supply is elastic the burden is on sellers
12
Q
income elasticity
A
- if Ny > 0 the good is normal
- if the Ny < 0 the good is inferior
13
Q
normal goods w income elasticity
A
- if income elasticity is positive but less than 1 demand is inelastic bc necessities
- if the income elasticity is positive and greater than one demand income is elastic bc luxuries
14
Q
cross elasticity
A
- if Nxy > 0 then X and Y are subs
- if Nxy < 0 then X and Y are complements