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ECON 208 > Chapter 4: Elasticity > Flashcards

Chapter 4: Elasticity Flashcards

1
Q

What does elasticity measure?

A

The “sensitivity” of one variable with respect to another

Used in economics to determine the responsiveness of a variable to shocks

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2
Q

What determines elasticity?

A

The shape of the demand/supply curves

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3
Q

What are five types of elasticity?

A

Own-price elasticity of demand (measures sensitivity of quantity demanded for X with respect to price of X)

Cross-price elasticity of demand (measures sensitivity of quantity demanded for X with respect to price of Y)

Income elasticity of demand (measures sensitivity of quantity demanded for X with respect to income)

Own-price elasticity of supply (measures sensitivity of quantity supplied of I with respect to price of I)

Elasticity of supply with respect to the price of labor (measures sensitivity of quantity supplied of I with respect to wage rate)

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4
Q

Demand is said to be ______ when quantity demanded is very responsive to a change in the product’s own price

A

Elastic

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5
Q

The more elastic demand is, the ____ the change in equilibrium price, and the _____ the change in equilibrium quantity resulting form any given shift in supply curve

A

Less
Greater

(flatter line)

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6
Q

True/False? Elasticity is related to the slope of the demand curve because they are the same

A

False (they are related though)

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7
Q

How is elasticity calculated?

A

n = (percentage change in quantity demanded)/(percentage change in price)
or
n = 1/slope X (Average price demanded/average quantity demanded)

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8
Q

How is percentage change calculated?

A

eg %deltaQ = deltaQ/Qbar

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9
Q

What happens when the demand elasticity is negative?

A

You take the absolute value

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10
Q

Elasticity along a linear curve is more _____ when prices are high/demand is low and more _____ when prices are low and demand is high

A

Elastic

Inelastic

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11
Q

Why does elasticity change along a straight line?

A

Because although the difference is the same between any two points the same distance away, the average price is getting greater and greater as you move along the x axis

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12
Q

A vertical line on a price/quantity graph demonstrates perfectly _____ demand

A

Inelastic

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13
Q

A horizontal line on a price/quantity graph demonstrates perfectly _____ demand

A

Elastic

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14
Q

What happens during unit elastic demand?

A

A given % increase in price induces the same % decrease in Q at all points on the curve

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15
Q

What determines elasticity? What is that determined by?

A

Availability of substitutes
Determined by
- how specifically the product is defined
- Whether the good is a necessity or luxury
- The length of the ‘run’ (short vs long)

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16
Q

elasticity of Demand for a particular brand of juice is relatively _____ compared to the elasticity for all beverages

A

Elastic (if the price of minutemaid goes up you can find more OJ but if all OJs go up you’ll still buy minutemaid)

17
Q

Ceteris Paribus, luxuries exhibit ____ demands, while necessities exhibit ____ demands

A

Elastic

Inelastic

18
Q

Short run demand curves are characteristically ____

A

Inelastic

19
Q

Long run demand curves are characteristically _____

A

Elastic

20
Q

How is total expenditure calculated?

A

TE = P x Q

21
Q

When demand is elastic, Total expenditure ____ when price falls

A

Increases

22
Q

When demand is inelastic, Total expenditure _____ when price falls

A

Decreases

23
Q

When does total expenditure reach a maximum?

A

When demand is unit elastic

24
Q

If elasticity of supply is greater than one, supply is considered _____

If it is below one, it is _____

A

elastic

Inelastic

25
Q

What does the elasticity of supply depend on? What does that depend on?

A

How easily firms can increase output in response to an increase in price

Depends on technical ease of substitution in production and Time span under consideration

26
Q

What is an Excise tax? What does it do in terms of price paid and received?

A

A tax on the sale of a particular commodity

An excise tax raises price paid by consumer and reduces price received by producers

27
Q

What determines tax incidence (Who bears the burden of the tax)?

A

The relative elasticities of supply and demand

28
Q

True/False? The burden of an excise tax depends on who actually remits the tax to the government

A

False. It depends on the relative elasticities of demand and supply

29
Q

Who bears the tax burden if demand is more elastic than supply?

A

Consumers

30
Q

Who bears the tax burden if supply is more elastic than demand?

A

Producers

31
Q

True/False? Tax causes supply to shift

A

True

32
Q

How do you calculate the new equilibrium Ps and Q with tax?

A

P(c) = P(s) + T

Solve for Q, plug in to each of the equations for Price

33
Q

How do you calculate government revenue during taxation?

A

New equilibrium Q x tax

Tax = P(c) - P(s)

34
Q

Can income elasticity be negative?

A

Yes

35
Q

What happens if income elasticity is negative? If it’s positive?

A

Negative: Increase in income leads to decrease in demand (inferior good)

Positive: Increase in income leads to increase in demand (normal good)

36
Q

What happens if income elasticity is greater than 1? Below 1 (but above 0)?

A

n(y) > 1: luxury good

0 < n(y) < 1: necessary good

37
Q

How do you calculate income elasticity of demand?

A

n(y) = Percentage change in demanded quantity / percentage change in income

38
Q

How do you calculate cross elasticity of demand?

A

n(xy) = percentage change in demanded quantity of X / percentage change in price of Y

39
Q

What happens if cross elasticity of demand is greater than zero? If it’s below zero?

A

n(xy) > 0 : X and Y are substitutes

n(xy) < 0: X and Y are compliments

ECON 208 (12 decks)

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