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ECON 208 > Chapter 4 - Elasticity > Flashcards

Chapter 4 - Elasticity Flashcards

1
Q

elastic demand def

A

qt demanded very responsive to change in products price

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2
Q

inelastic demand def

A

qt demanded is very unresponsive to change in products price

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3
Q

Elasticity is related to the _______ of the _______ curve but ________

A

slope. demand. not exactly the same

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4
Q

Conditions to do comparison of elasticity of 2 demand curves - with respect to a shift in supply (2) and what if conditions not met

A

1) 2 figures drawn on same scale
2) Start from same price-quantity equilibrium
otherwise, need % change in price and qts of products

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5
Q

elasticity symbol

A

η (eta)

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6
Q

How to determine elasticity of demand at a particular point in demand curve

A

1) This point is (Qd bar, p bar) bar = fix. 2) Choose a point above and a point below (q1,p1) and (q2,p2)
3) η = delta Q / Q bar divided by delta P / P bar

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7
Q

sign of η and what economists do

A

negative. economists emphasize absolute value

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8
Q

Actual η formula considering that the middle point is the average of the two points around

A

η = (Q1 - Q0)/(Q1 + Q0) divided by (P1 - P0)/(P1 + P0)

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9
Q

Other way of writing the η formula and what first part is

A

η = delta Q/delta P multiplied by P bar / Q bar. First part is reciprocal (inverse) of the slope

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10
Q

How elasticity behaves along a linear demand curve

A

falls down as you move down linear demand curve

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11
Q

5 points/regions important on linear demand curve

A

1) Top : η =infinity, Perfectly elastic 2) Elastic η>1 3) Unit elastic η=1 4) Inelastic η<1 5) Perfectly inelastic η=0

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12
Q

Which of the 5 points/regions important on linear demand curve will producers try to reach and why

A

Unit elastic point (η=1) to maximize expenditure

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13
Q

3 demand curves with constant elasticity

A

Vertical, horizontal and hyperbol for which demand*price is constant (p=a/q)

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14
Q

Horizontal curve elasticity and value

A

Perfectly elastic (η=infinity - REMEMBER IT IS THE RECIPROCAL OF THE SLOPE)

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15
Q

Vertical curve elasticity and value

A

Perfectly inelastic (η=0)

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16
Q

Hyperbol curve (p=a/q) elasticity value

A

elasticity = 1

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17
Q

Linear demand slope and elasticity

A

constant slope (constant relation of changes in P and Q) and different elasticities

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18
Q

Non-linear demand curve

A

not constant slope (relation of changes in P and Q changes) and elasticities may vary along the curve

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19
Q

what determines elasticity of demand

A

Availability of substitutes.

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20
Q

when is demand elasticity high

A

when there are many close substitutes

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21
Q

what determines availability of substitutes (3)

A

1) length of the time interval considered (time given to consumer to react)
2) wether the good is a necessity or a luxury
2) how specifically the product is defined

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22
Q

Short run vs long-run equilibrium following an increase in supply

A

in the long run, demand is more elastic. demand turns along the initial equilibrium point

23
Q

narrowly defined products demand elasticity

A

more elastic demand (can be replaced easily)

24
Q

What total expenditure depends on

A

relative changes in price and quantity

25
Q

Total expenditure formula

A

Price x quantity

26
Q

Total expenditure behavior when elastic demand (η > 1)

A

Higher price = smaller TE, lower price = higher TE

27
Q

Total expenditure behavior when inelastic demand (η

A

Higher price = higher TE, lower price = lower TE

28
Q

where total expenditure reaches a maximum

A

when demand is unit elastic (η = 1)

29
Q

price elasticity of supply ηs formula

A

delta Q supplied / average Q supplied divided by delta price / average price

30
Q

What influences elasticity of supply

A

How easily firms can increase output in response to higher price

31
Q

What influences how easily firms can increase output

A

1) Technical ease of substitution in production (how easy is it to change production for product with the higher price)
2) Nature of production costs
3) Time span under consideration

32
Q

Excise tax def.

A

Tax on the sale of a particular commodity

33
Q

Tax Incidence def

A

Who bears the burden of the tax ?

34
Q

Revenue raised by tax (to the gvt ) TR formula

A

TR = q x tax

35
Q

How tax incidence can be seperated

A

Consumer burden and producer burden

36
Q

What burden of an excise tax depends upon

A

elasticities of demand and supply

37
Q

more inelastic is demand, more burden for __________

A

consumers

38
Q

Another way of seeing the tax

A

At equilibrium price (P0), price paid by the consumer (Pc) must be $ T higher than the price received by the supplier (Ps)

39
Q

Consumer burden formula

A

CB = q x (PC - P0)

40
Q

Producer burden formula

A

PB = q x (P0 - PB)

41
Q

Other context where price elasticity can be used and how

A

Employment and wages. Workers supply labors. Firms demand labor.

42
Q

In employment and wages model, how are payroll taxes seen

A

seen as job killers (reduce demand for labour)

43
Q

In employment and wages model how different types of labor represented

A

different curves

44
Q

What can alter the employment market

A

Presence of unions can change the competitive character of the market

45
Q

Other demand elasticities (give 1)

A

Income elasticity of demand

46
Q

Income elasticity of demand formula (ηy)

A

ηy = % change in qt demanded / % change in income

47
Q

Intepretation of ηy

A

ηy < 0 = inferior good ηy > 0 normal good

48
Q

2 categories of goods within normal goods

A

Luxuries and necessities

49
Q

Link between necessity/luxury and INCOME elasticity

A

Necessity = low income elasticity Luxury = high income elasticity

50
Q

What (also) influences income elasticity for a given product

A

Level of income

51
Q

Increase income effect on economy

A

Depending on income elasticity of each product, demands might stay the same, decrease or increase for particular products

52
Q

Cross elasticity demand formula

A

ηxy = % change in qt demanded of good X / % change in price of good Y

53
Q

Cross elasticity interpretation

A

ηxy > 0, X and Y are substitutes. Higher price of Y, I want more X to substitute it
ηxy < 0, X and Y are complements. Higher price of Y, I consume less Y and therefore less X because I consume them together

ECON 208 (8 decks)

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