Chapter 4 - Elasticity Flashcards
elastic demand def
qt demanded very responsive to change in products price
inelastic demand def
qt demanded is very unresponsive to change in products price
Elasticity is related to the _______ of the _______ curve but ________
slope. demand. not exactly the same
Conditions to do comparison of elasticity of 2 demand curves - with respect to a shift in supply (2) and what if conditions not met
1) 2 figures drawn on same scale
2) Start from same price-quantity equilibrium
otherwise, need % change in price and qts of products
elasticity symbol
η (eta)
How to determine elasticity of demand at a particular point in demand curve
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
sign of η and what economists do
negative. economists emphasize absolute value
Actual η formula considering that the middle point is the average of the two points around
η = (Q1 - Q0)/(Q1 + Q0) divided by (P1 - P0)/(P1 + P0)
Other way of writing the η formula and what first part is
η = delta Q/delta P multiplied by P bar / Q bar. First part is reciprocal (inverse) of the slope
How elasticity behaves along a linear demand curve
falls down as you move down linear demand curve
5 points/regions important on linear demand curve
1) Top : η =infinity, Perfectly elastic 2) Elastic η>1 3) Unit elastic η=1 4) Inelastic η<1 5) Perfectly inelastic η=0
Which of the 5 points/regions important on linear demand curve will producers try to reach and why
Unit elastic point (η=1) to maximize expenditure
3 demand curves with constant elasticity
Vertical, horizontal and hyperbol for which demand*price is constant (p=a/q)
Horizontal curve elasticity and value
Perfectly elastic (η=infinity - REMEMBER IT IS THE RECIPROCAL OF THE SLOPE)
Vertical curve elasticity and value
Perfectly inelastic (η=0)
Hyperbol curve (p=a/q) elasticity value
elasticity = 1
Linear demand slope and elasticity
constant slope (constant relation of changes in P and Q) and different elasticities
Non-linear demand curve
not constant slope (relation of changes in P and Q changes) and elasticities may vary along the curve
what determines elasticity of demand
Availability of substitutes.
when is demand elasticity high
when there are many close substitutes
what determines availability of substitutes (3)
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
Short run vs long-run equilibrium following an increase in supply
in the long run, demand is more elastic. demand turns along the initial equilibrium point
narrowly defined products demand elasticity
more elastic demand (can be replaced easily)
What total expenditure depends on
relative changes in price and quantity
Total expenditure formula
Price x quantity
Total expenditure behavior when elastic demand (η > 1)
Higher price = smaller TE, lower price = higher TE
Total expenditure behavior when inelastic demand (η
Higher price = higher TE, lower price = lower TE
where total expenditure reaches a maximum
when demand is unit elastic (η = 1)
price elasticity of supply ηs formula
delta Q supplied / average Q supplied divided by delta price / average price
What influences elasticity of supply
How easily firms can increase output in response to higher price
What influences how easily firms can increase output
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
Excise tax def.
Tax on the sale of a particular commodity
Tax Incidence def
Who bears the burden of the tax ?
Revenue raised by tax (to the gvt ) TR formula
TR = q x tax
How tax incidence can be seperated
Consumer burden and producer burden
What burden of an excise tax depends upon
elasticities of demand and supply
more inelastic is demand, more burden for __________
consumers
Another way of seeing the tax
At equilibrium price (P0), price paid by the consumer (Pc) must be $ T higher than the price received by the supplier (Ps)
Consumer burden formula
CB = q x (PC - P0)
Producer burden formula
PB = q x (P0 - PB)
Other context where price elasticity can be used and how
Employment and wages. Workers supply labors. Firms demand labor.
In employment and wages model, how are payroll taxes seen
seen as job killers (reduce demand for labour)
In employment and wages model how different types of labor represented
different curves
What can alter the employment market
Presence of unions can change the competitive character of the market
Other demand elasticities (give 1)
Income elasticity of demand
Income elasticity of demand formula (ηy)
ηy = % change in qt demanded / % change in income
Intepretation of ηy
ηy < 0 = inferior good ηy > 0 normal good
2 categories of goods within normal goods
Luxuries and necessities
Link between necessity/luxury and INCOME elasticity
Necessity = low income elasticity Luxury = high income elasticity
What (also) influences income elasticity for a given product
Level of income
Increase income effect on economy
Depending on income elasticity of each product, demands might stay the same, decrease or increase for particular products
Cross elasticity demand formula
ηxy = % change in qt demanded of good X / % change in price of good Y
Cross elasticity interpretation
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
