Chapter 4: Elasticity Flashcards
What does elasticity measure?
The “sensitivity” of one variable with respect to another
Used in economics to determine the responsiveness of a variable to shocks
What determines elasticity?
The shape of the demand/supply curves
What are five types of elasticity?
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)
Demand is said to be ______ when quantity demanded is very responsive to a change in the product’s own price
Elastic
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
Less
Greater
(flatter line)
True/False? Elasticity is related to the slope of the demand curve because they are the same
False (they are related though)
How is elasticity calculated?
n = (percentage change in quantity demanded)/(percentage change in price)
or
n = 1/slope X (Average price demanded/average quantity demanded)
How is percentage change calculated?
eg %deltaQ = deltaQ/Qbar
What happens when the demand elasticity is negative?
You take the absolute value
Elasticity along a linear curve is more _____ when prices are high/demand is low and more _____ when prices are low and demand is high
Elastic
Inelastic
Why does elasticity change along a straight line?
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
A vertical line on a price/quantity graph demonstrates perfectly _____ demand
Inelastic
A horizontal line on a price/quantity graph demonstrates perfectly _____ demand
Elastic
What happens during unit elastic demand?
A given % increase in price induces the same % decrease in Q at all points on the curve
What determines elasticity? What is that determined by?
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)
elasticity of Demand for a particular brand of juice is relatively _____ compared to the elasticity for all beverages
Elastic (if the price of minutemaid goes up you can find more OJ but if all OJs go up you’ll still buy minutemaid)
Ceteris Paribus, luxuries exhibit ____ demands, while necessities exhibit ____ demands
Elastic
Inelastic
Short run demand curves are characteristically ____
Inelastic
Long run demand curves are characteristically _____
Elastic
How is total expenditure calculated?
TE = P x Q
When demand is elastic, Total expenditure ____ when price falls
Increases
When demand is inelastic, Total expenditure _____ when price falls
Decreases
When does total expenditure reach a maximum?
When demand is unit elastic
If elasticity of supply is greater than one, supply is considered _____
If it is below one, it is _____
elastic
Inelastic
What does the elasticity of supply depend on? What does that depend on?
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
What is an Excise tax? What does it do in terms of price paid and received?
A tax on the sale of a particular commodity
An excise tax raises price paid by consumer and reduces price received by producers
What determines tax incidence (Who bears the burden of the tax)?
The relative elasticities of supply and demand
True/False? The burden of an excise tax depends on who actually remits the tax to the government
False. It depends on the relative elasticities of demand and supply
Who bears the tax burden if demand is more elastic than supply?
Consumers
Who bears the tax burden if supply is more elastic than demand?
Producers
True/False? Tax causes supply to shift
True
How do you calculate the new equilibrium Ps and Q with tax?
P(c) = P(s) + T
Solve for Q, plug in to each of the equations for Price
How do you calculate government revenue during taxation?
New equilibrium Q x tax
Tax = P(c) - P(s)
Can income elasticity be negative?
Yes
What happens if income elasticity is negative? If it’s positive?
Negative: Increase in income leads to decrease in demand (inferior good)
Positive: Increase in income leads to increase in demand (normal good)
What happens if income elasticity is greater than 1? Below 1 (but above 0)?
n(y) > 1: luxury good
0 < n(y) < 1: necessary good
How do you calculate income elasticity of demand?
n(y) = Percentage change in demanded quantity / percentage change in income
How do you calculate cross elasticity of demand?
n(xy) = percentage change in demanded quantity of X / percentage change in price of Y
What happens if cross elasticity of demand is greater than zero? If it’s below zero?
n(xy) > 0 : X and Y are substitutes
n(xy) < 0: X and Y are compliments
