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Micro Economics > Chapter 4- Elasticity > Flashcards

Chapter 4- Elasticity Flashcards

1
Q

Price elasticity of demand calculations

A

Calculated with percentage change

% change in quantity demanded
———————————————
% change in price

Percetnage change
= delta P or Qd / average P or Qd

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2
Q

What doesnt serve us well when comparing different products?

A

The slope of the demand curve

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3
Q

Whats important to consider regarding pricing decision?

What is elasticity all about

A

The responsiveness of the market (Qd or Qs)

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4
Q

Elasiticity decreases when:

A

Going from high prices to low prices

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5
Q

How will the elasticity be for a demand curve thats almost horizontal

A

Elasticity will be high because any price change will cause large amount of changes in quantity demanded

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6
Q

What is unit elasticity

A

If demand curve value is exactly 1 or -1

Its the equilibrium point with supply curve

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7
Q

It the demand curve, when is it considered to be elastic?

A

When it is above unit elasticity

Has to be higher that 1 or n - 1 in demand curve

At high values, it is elastic

At price change, the quantity demanded change makes a lot of a difference in revenues

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8
Q

In demand curve, when is it considered to be inelastic?

A

When the value lies between unity and 0

If prices low, usually inelastic

Price change makes almost no difference in revenue generated by quantity demanded change

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9
Q

What does it mean when economists say that demand has high or low elasticity

A

It means that at a given price, the elasticity has high or low value

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10
Q

How is the elasticity of basic needs

A

Elasticity is basically inexistent

Ex: food

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11
Q

On the demand curve, when is there max expenditure

A

At midpoint

If you sell at price too high, not much quantity demanded, so lower price so that more quantity demanded

At one point, if too low, yes there would be a lot of quantity demanded but not enough money generated, so up prices

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12
Q

Is price elasticity of demand frequently lower in the short run or long run?

A

Short run boyyy

Consumers cant adapt

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13
Q

What is price elasticity of demand

A

Tells us about consumer responses to price changes in different regions of the demand curve holding all the other exterior variables constant

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14
Q

Cross price elasticity of demand

A

Percentage change in quantity demanded of a product
/
Percentage change in the price of another

Can be positive or negative

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15
Q

Income elasticity of demand

A

Percentage change quantity demanded
/
Percentage change in income

Can be positive or negative

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16
Q

Is elasticity of inferior good positive or negative

A

Negative

Decrease in demand

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17
Q

Midpoint of demand

A

The average point in demand curve

Unit elasticity at this point

18
Q

Elasticity value at intercept

A

Élasticité at P=0 is -infinity (in demand)

Élasticité at Qd=0 is 0 (in demand)

19
Q

Unit elasticity

A

When elasticity is either 1 or -1

At midpoint

Above it is high elasticity

Below it is is low elasticity

20
Q

Fixed Qd

Vertical demand curve

A

No elasticity

Any change in price would have 0 effect on elasticity of Qd

Quantity demanded wont change

21
Q

Fixed price

Horizontal demand

A

Infinite elasticity

Quantity supplied can change infinitely without the price changing

22
Q

Basic necessities are most likely do me elastic or inelastic in demand?

A

Inelastic

People wont have a choice even if price change demand and Qd wont

23
Q

Elasticity of luxury good

A

Exceed or is equal to unity

24
Q

Elasticity of necessity

A

Between 0 and unity

25
Q

If a good or brand can be easily substituted? Elastic or inelastic?

If all related goods change prices? Elastic or inelastic?

A

Elastic

Inelastic

In

25
Q

What happens if theres a supply shock on an elastic demand

A

Will have small effect on price

Will have large effect on quantity demanded

25
Q

What happens when theres a supply shock on inelastic demand

A

Large impact on price

Low impact on quantity demanded

26
Q

Formula for total revenue

A

P x Q

27
Q

What happens if price falls on elastic demand

A

Revenue from new sales will exceed fall in revenue from existing sales

Total revenue will rise

28
Q

Hat happens if price falls on inelastic demand

A

Revenue from new sales will be less than the fall in revenue from existing sales

Total revenue will fall

29
Q

Is price elasticity of demand frequently higher in the short run or long run?

A

Long run

Consumers have time to adapt

30
Q

If two goods are substitutes, is the cross price positive or negative?

A

Positive

Cause if price of one goes up, so will demand of the other and vice versa so in calculation, it remains positive

31
Q

If two goods are comp,ements, is the cross price positive or negative?

A

Negative

Cause of price of one goes up, Quantity demanded of other goes down, hence in calculation it is negative

32
Q

Is cross price policy important in public social policy as well as startegic commercial policy?

A

Yeee boy

Example illegal and legal strong substitutes

High cross price elasticity of demand

33
Q

Do inflation rates affect price elasticity of demand?

A

When computing price elasticity of demand for one good

we use price change of that good relative to the inflation rate

34
Q

Elasticity of supply

A

Responsiveness of quantity supplied to a change in price

Same calculation as demand elasticity

35
Q

What does it mean when supply curve is vertical or almost vertical

A

Supply elasticity is almost non existent when almost vertical

When vertical no elasticity

Change in prices = almost no changes in Quantity supplied

36
Q

When supply curve horizontal

A

Elasticity is infinite

37
Q

Types of taxes

A

Specific tax (fixed dollar levy per unit sold)

Ad valorem type (percentage levy)

38
Q

tax incidence

A

how tax burden is shared by buyers and sellers

increase or decrease if tax changes the price

have to examine net effect of tax on equilibrium price

39
Q

tax supply with elastic supply

A

the more elastic the supply is, the more incidence on the buyer

tax causes supply to shift

price to buyer increases

price to supplier declines

40
Q

elasticities using slope of supply or demand curve

A

Ed = Delta Q / Q

first term now the slop (or inverse of slope) of demand curve

formulation permits computation of elasticity value at a point on demand curve (for imperceptibly small change in price)

arc formula would not permit this

if demand curve is straight line, slope is constant

elasticity value is the product of this slope and ration of price and quantity coordinates

Micro Economics (13 decks)

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