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