Chapter 4: Elasticity Flashcards
What is price elasticity of demand?
a units-free measurement of the responsiveness of the quantity demanded of a good to a change in price.
For demand: when a good/service is sensitive (consumers are willing to pay anything for this good) to a change in price, what does that mean? Give an example of a sensitive good.
it means that the good/service is inelastic.
an example of this is a necessity (medicine)
For demand: when a good/service is not sensitive to a change in price, what does that mean? Give an example of a non-sensitive good.
it means that the good/service is elastic. If the price changes a little bit, consumers are not going to want to buy the good anymore.
An example of this would be when 2 side-by-side vending machines have the same products.
What is the equation for the price elasticity of demand?
e=|(delta Q / ave. Q) / (delta P / ave. P)|
What does a perfectly inelastic curve look like? What values would of price elasticity of demand would be considered perfectly inelastic?
A horizontal line.
= infinity
What does a perfectly elastic curve look like? What values would of price elasticity of demand would be considered perfectly elastic?
A vertical line
= 0
What does an inelastic curve look like? What values would of price elasticity of demand would be considered inelastic?
A steep sloping downward line.
=1
What does a elastic curve look like? What values would of price elasticity of demand would be considered elastic?
A gradual sloping downward line.
=e>1
What are the factors that influence elasticity of demand?
- Closeness of substitutes
- Proportion of income
- Time elapsed
How does closeness of substitutes influence elasticity of demand?
the closer the substitutes for the good, the more elastic it is.
How does proportion of income influence elasticity of demand?
the greater the proportion of income people spend on a good, the more elastic they will be to the price (ex. paying rent)
if they spend an insignificant proportion of their income on a good, they will be inelastic to the changing of the price (ex. package of gum)
How does time elapsed influence elasticity of demand?
the more time the good is available, the more elastic it is.
How do you calculate total revenue?
TR=price x quantity sold
how are TR and price elasticity of demand related?
The change in total revenue depends on the elasticity of demand of the good
When the demand is elastic, what happens to the TR?
TR increases, so firms should decrease their price
When the demand is inelastic, what happens to the TR?
TR decreases, so firms should increase their price.
When the demand is unit elastic, what happens to the TR?
TR remains the same. Any change in price = change in quantity demanded.
What is the total revenue test?
It is a method of estimating the price elasticity of demand by observing the change in total revenue.
What is income elasticity of demand?
It’s a method of the responsiveness of the demand for a good relative to a change in income.
How is the income elasticity of demand calculated?
e = (delta Q / ave. Q) / (delta M / ave. M)
where m = income
If income is e>1, what does that mean? Is the good an inferior good or normal good?
This means that the income is elastic, and that it is a normal good.
If income is 0
This means that the income is inelastic, and that it is a normal good.
If income is e<0, what does that mean? Is the good an inferior good or normal good?
This means that income is an inferior good.
What is an inferior good?
When income increases, quantity demanded for the good decreases.
What is a normal good?
When income increases, quantity demanded for the good increases.
What is cross elasticity of demand?
a measure of the responsiveness of the demand for a good to change in the price of a substitute or complement.
How do you measure cross elasticity of demand?
ce = (delta Q / av. Q ) / (delta P / av. P ) Q = quantity demanded of good A P = price of good B
If the cross elasticity of demand is positive, what does that mean?
it means that the Q and P change in the same direction - substitutes.
If the cross elasticity of demand is negative, what does that mean?
it means that the Q and P change in the opposite direction - complements.
What is elasticity of supply?
measures the responsiveness of the quantity supplied to a change in the price of a good.
How do you calculate elasticity of supply?
e = (delta Q / av. Q ) / (delta P / av. P )
For elasticity of supply, what does it mean if e>1?
it means that the supply is elastic
For elasticity of supply, what does it mean if 0
supply is inelastic
For elasticity of supply, what does it mean if e = 1?
it means that supply is unit elastic.
What are the factors that affect elasticity of supply?
- Resource substititution
- Time frame
How does resource substitution influence elasticity of supply?
if it is hard to find substitutes, then supply is inelastic.
easy = elastic
How does time frame influence elasticity of supply?
the longer it is available, the more elastic it is.
If a good can be made/sold quickly, is it inelastic or elastic?
elastic.
