Chapter 4 - Elasticity

Question 1

elastic demand def

Answer 1

qt demanded very responsive to change in products price

Question 2

inelastic demand def

Answer 2

qt demanded is very unresponsive to change in products price

Question 3

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

Answer 3

slope. demand. not exactly the same

Question 4

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

Answer 4

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

Question 5

elasticity symbol

Answer 5

η (eta)

Question 6

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

Answer 6

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

Question 7

sign of η and what economists do

Answer 7

negative. economists emphasize absolute value

Question 8

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

Answer 8

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

Question 9

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

Answer 9

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

Question 10

How elasticity behaves along a linear demand curve

Answer 10

falls down as you move down linear demand curve

Question 11

5 points/regions important on linear demand curve

Answer 11

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

Question 12

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

Answer 12

Unit elastic point (η=1) to maximize expenditure

Question 13

3 demand curves with constant elasticity

Answer 13

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

Question 14

Horizontal curve elasticity and value

Answer 14

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

Question 15

Vertical curve elasticity and value

Answer 15

Perfectly inelastic (η=0)

Question 16

Hyperbol curve (p=a/q) elasticity value

Answer 16

elasticity = 1

Question 17

Linear demand slope and elasticity

Answer 17

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

Question 18

Non-linear demand curve

Answer 18

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

Question 19

what determines elasticity of demand

Answer 19

Availability of substitutes.

Question 20

when is demand elasticity high

Answer 20

when there are many close substitutes

Question 21

what determines availability of substitutes (3)

Answer 21

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

Question 22

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

Answer 22

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

Question 23

narrowly defined products demand elasticity

Answer 23

more elastic demand (can be replaced easily)

Question 24

What total expenditure depends on

Answer 24

relative changes in price and quantity

Question 25

Total expenditure formula

Answer 25

Price x quantity

Question 26

Total expenditure behavior when elastic demand (η > 1)

Answer 26

Higher price = smaller TE, lower price = higher TE

Question 27

Total expenditure behavior when inelastic demand (η

Answer 27

Higher price = higher TE, lower price = lower TE

Question 28

where total expenditure reaches a maximum

Answer 28

when demand is unit elastic (η = 1)

Question 29

price elasticity of supply ηs formula

Answer 29

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

Question 30

What influences elasticity of supply

Answer 30

How easily firms can increase output in response to higher price

Question 31

What influences how easily firms can increase output

Answer 31

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

Question 32

Excise tax def.

Answer 32

Tax on the sale of a particular commodity

Question 33

Tax Incidence def

Answer 33

Who bears the burden of the tax ?

Question 34

Revenue raised by tax (to the gvt ) TR formula

Answer 34

TR = q x tax

Question 35

How tax incidence can be seperated

Answer 35

Consumer burden and producer burden

Question 36

What burden of an excise tax depends upon

Answer 36

elasticities of demand and supply

Question 37

more inelastic is demand, more burden for __________

Answer 37

consumers

Question 38

Another way of seeing the tax

Answer 38

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

Question 39

Consumer burden formula

Answer 39

CB = q x (PC - P0)

Question 40

Producer burden formula

Answer 40

PB = q x (P0 - PB)

Question 41

Other context where price elasticity can be used and how

Answer 41

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

Question 42

In employment and wages model, how are payroll taxes seen

Answer 42

seen as job killers (reduce demand for labour)

Question 43

In employment and wages model how different types of labor represented

Answer 43

different curves

Question 44

What can alter the employment market

Answer 44

Presence of unions can change the competitive character of the market

Question 45

Other demand elasticities (give 1)

Answer 45

Income elasticity of demand

Question 46

Income elasticity of demand formula (ηy)

Answer 46

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

Question 47

Intepretation of ηy

Answer 47

ηy < 0 = inferior good ηy > 0 normal good

Question 48

2 categories of goods within normal goods

Answer 48

Luxuries and necessities

Question 49

Link between necessity/luxury and INCOME elasticity

Answer 49

Necessity = low income elasticity Luxury = high income elasticity

Question 50

What (also) influences income elasticity for a given product

Answer 50

Level of income

Question 51

Increase income effect on economy

Answer 51

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

Question 52

Cross elasticity demand formula

Answer 52

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

Question 53

Cross elasticity interpretation

Answer 53

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