Chapter 4 - Elasticity Flashcards
What is the law of demand and supply?
Reduction of price increases QD and reduces QS
What is elasticity?
Our response/sensitivity to shock in economy
What is own-price elasticity of demand?
QD of commodity x with respect to the price of commodity x
What is cross-price elasticity of demand?
Demand for commodity x with respect to the price of commodity y
What is income elasticity of demand?
Demand for commodity x with respect to income
Give an example of cross-price - demand
Coffee and tea
Give an example of income - demand
How you increase consumption of normal or inferior good
What is own-price elasticity of supply?
Quantity supplies of commodity i with respect to the price of commodity i
Give an example of own-price - supply
If wheat price inc., how much producers will change production
What is elasticity of supply with respect to the price of labour?
Quantity supplied of commodity i with respect to the wage rate
Differentiate elastic and inelastic
Elastic: QD is very responsive to change in price
Inelastic: QD is very unresponsive to change in price
The more elastic demand is, the _ the change in eq. price and _ the change in eq. quantity
Less, greater
Which is more steep - elastic or inelastic?
Inelastic
What is nd?
% change in QD/% change in P
[change in QD/avg QD]/[change in P/avg P]
[avg P/avg QD]/[slope]
N is an _ value and _ free
Absolute, unit
When n=infinity, the curve is _ _
Perfectly elastic (horizontal)
When n>1, the curve is _
Elastic
When n=1, the curve is _ _
Unit elastic
When n<1, the curve is _
Inelastic
When n=0, the curve is _ _
Perfectly inelastic (vertical)
On a downward sloping curve, elasticity is always _
1
Narrowly define products have (more/less) elastic demands than do more broadly define products
More
Consumers can readily substitute one brand of beverages for another if the price rises. Elastic or inelastic?
Elastic for a particular brand
If all beverages’ prices rise, the consumer cannot switch. Elastic or inelastic?
Inelastic for detergents as a group
Luxuries exhibit _ demands, while necessities exhibit _ demands
Elastic, inelastic
What is a short-run demand/supply curve?
Shows immediate response of QD/QS to a change in price
More inelastic
What is a long-run demand/supply curve?
Shows response after enough time has passed to a) develop/switch to substitute products or b) allow producers to adjust their productive capacity
More elastic
What is the equation for total expenditure?
Price x Quantity
When demand is elastic, TE (increases/decreases) when price falls
Increases
When demand is inelastic, TE (increases/decreases) when price falls
Decreases
When demand is unit elastic, TE reaches a _
Maximum
What is ns?
% change in QS/% change in P
[change in QS/avg QS]/[change in P/avg P]
[avg P/avg QS]/[slope]
What determinants do supply elasticity depend on? (2)
Technical ease of substitution in production
Time span under consideration
What determinants does demand elasticity depend on? (3)
Narrowly vs broadly defined
Necessity vs luxury
Length of time interval
Why measure price elasticity?
Tax incidence
What is an excise tax?
Tax on the sale of a particular commodity
An excise tax raises the price paid by _ but reduces the price received by _
Consumers, producers
The more elastic a demand, the (more/less) burden for consumers
Less
The more inelastic a demand, the (more/less) burden for consumers
More
Tax causes supply to shift. T/F?
True
The more elastic the SC, the (more/less) burden on consumer, and (more/less) on the producer
More, less
The more inelastic the SC, the (more/less) burden on the consumer, and (more/less) on the producer
Less, more
How do you find Q* and P* in equilibrium without tax?
Equate demand and supply equations
Pc=Ps
How do you find Qnew and Pnew in equilibrium with tax?
Pc=Ps+T
How do you find govt revenue?
Qnew x Tax
How do you find part paid by consumers?
Qnew x (Pc-P*)
How do you find part paid by suppliers?
Qnew x (P*-Ps)
What is the equation for ny, income elasticity of demand?
% change in QD/% change in income
When ny > 0, the good is a(n) _ good
Normal
When ny < 0, the good is a(n) _ good
Inferior
When 0 < ny < 1, the normal good is a _ good
Necessary
When ny > 0, the normal good is a _ good
Luxury
The more necessary an item is, the _ its income elasticity
Lower
What is the equation for nxy, cross elasticity of demand?
% change in QD of good X/% change in price of good Y
If nxy > 0, X and Y are _
Substitutes
If nxy < 0, X and Y are _
Complements
