Chapter 4 - Elasticity Flashcards
What is elasticity?
a measure of the responsiveness to a change in a market condition
Price elasticity of demand (definition)
measures the magnitude of change in the quantity demanded from a change in its price.
what does “more elastic” mean?
aka elastic
when consumers’ buying decisions are highly influenced by price
- small change in price causes a large change in the quantity demanded
- consumers are very sensitive to price
what does “more inelastic” mean? (less elastic)
aka inelastic
when consumers are not very sensitive to price changes
- will buy approximately the same quantity regardless of the price
- changes in price do not really change quantity demanded
What is the midpoint method?
calculates the elasticity a the midpoint of any two points!
(Q2-Q1)/[(Q2+Q1)/2]
(P2-P1)/[(P2+P1)/2]
What are the determinants of price elasticity of demand
- availability of substitutes
- degree of necessity
- cost relative to income
- adjustment time
- scope of the market
What does perfectly inelastic mean?
demand curve is horizontal
- consumers are very sensitive to price, because demand drops to zero when the price increases even a MINUSCULE amount
What is perfectly inelastic?
demand curve is vertical
- quantity demanded is the same no matter what the price
Elastic
the absolute value of the price elasticity of demands is GREATER THAN 1
Inelastic
the absolute value of the price elasticity of demand is LESS THAN 1
Unit-Elastic
the absolute value of elasticity is EXACTLY 1
What is total revenue?
the amount that a firm receives from the sale of goods and services
TR = P (price paid) x Q (quantity sold)
What is quantity and price effect?
Quantity = decrease in revenue that results from selling fewer units of the good
Price = increase in revenue that results from receiving a higher price for each unit sold
*when demand is elastic, price increase causes total revenue to fall
What is price elasticity of supply?
measures producers’ response (in quantity) to a change in price
midpoint formula
What are the determinants of price elasticity of supply?
- availability of inputs
- flexibility of the production process
- adjustment time
What is cross-price elasticity?
how the quantity demanded of one good changes when the price of a different good changes
Cross- price elasticity of demand equation
% change in quantity A demanded / % change in price of B
Positive cross-price elasticity
when two goods are substitutes
Negative cross-price elasticity
when two goods are complements
What is income elasticity of demand?
how much the quantity demanded changes in response to a change in consumers’ incomes
Income elasticity of demand equation
% change in quantity demand / % change in income
>0 = good is normal (necessity) >1 = luxury <0 = good is inferior
Normal and Inferior goods
Normal = demand INCREASES when income increases
Inferior = demand DECREASES when income increases
