Chapter 4- Elasticity Flashcards
Price elasticity of demand calculations
Calculated with percentage change
% change in quantity demanded
———————————————
% change in price
Percetnage change
= delta P or Qd / average P or Qd
What doesnt serve us well when comparing different products?
The slope of the demand curve
Whats important to consider regarding pricing decision?
What is elasticity all about
The responsiveness of the market (Qd or Qs)
Elasiticity decreases when:
Going from high prices to low prices
How will the elasticity be for a demand curve thats almost horizontal
Elasticity will be high because any price change will cause large amount of changes in quantity demanded
What is unit elasticity
If demand curve value is exactly 1 or -1
Its the equilibrium point with supply curve
It the demand curve, when is it considered to be elastic?
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
In demand curve, when is it considered to be inelastic?
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
What does it mean when economists say that demand has high or low elasticity
It means that at a given price, the elasticity has high or low value
How is the elasticity of basic needs
Elasticity is basically inexistent
Ex: food
On the demand curve, when is there max expenditure
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
Is price elasticity of demand frequently lower in the short run or long run?
Short run boyyy
Consumers cant adapt
What is price elasticity of demand
Tells us about consumer responses to price changes in different regions of the demand curve holding all the other exterior variables constant
Cross price elasticity of demand
Percentage change in quantity demanded of a product
/
Percentage change in the price of another
Can be positive or negative
Income elasticity of demand
Percentage change quantity demanded
/
Percentage change in income
Can be positive or negative
Is elasticity of inferior good positive or negative
Negative
Decrease in demand
Midpoint of demand
The average point in demand curve
Unit elasticity at this point
Elasticity value at intercept
Élasticité at P=0 is -infinity (in demand)
Élasticité at Qd=0 is 0 (in demand)
Unit elasticity
When elasticity is either 1 or -1
At midpoint
Above it is high elasticity
Below it is is low elasticity
Fixed Qd
Vertical demand curve
No elasticity
Any change in price would have 0 effect on elasticity of Qd
Quantity demanded wont change
Fixed price
Horizontal demand
Infinite elasticity
Quantity supplied can change infinitely without the price changing
Basic necessities are most likely do me elastic or inelastic in demand?
Inelastic
People wont have a choice even if price change demand and Qd wont
Elasticity of luxury good
Exceed or is equal to unity
Elasticity of necessity
Between 0 and unity
If a good or brand can be easily substituted? Elastic or inelastic?
If all related goods change prices? Elastic or inelastic?
Elastic
Inelastic
In
What happens if theres a supply shock on an elastic demand
Will have small effect on price
Will have large effect on quantity demanded
What happens when theres a supply shock on inelastic demand
Large impact on price
Low impact on quantity demanded
Formula for total revenue
P x Q
What happens if price falls on elastic demand
Revenue from new sales will exceed fall in revenue from existing sales
Total revenue will rise
Hat happens if price falls on inelastic demand
Revenue from new sales will be less than the fall in revenue from existing sales
Total revenue will fall
Is price elasticity of demand frequently higher in the short run or long run?
Long run
Consumers have time to adapt
If two goods are substitutes, is the cross price positive or negative?
Positive
Cause if price of one goes up, so will demand of the other and vice versa so in calculation, it remains positive
If two goods are comp,ements, is the cross price positive or negative?
Negative
Cause of price of one goes up, Quantity demanded of other goes down, hence in calculation it is negative
Is cross price policy important in public social policy as well as startegic commercial policy?
Yeee boy
Example illegal and legal strong substitutes
High cross price elasticity of demand
Do inflation rates affect price elasticity of demand?
When computing price elasticity of demand for one good
we use price change of that good relative to the inflation rate
Elasticity of supply
Responsiveness of quantity supplied to a change in price
Same calculation as demand elasticity
What does it mean when supply curve is vertical or almost vertical
Supply elasticity is almost non existent when almost vertical
When vertical no elasticity
Change in prices = almost no changes in Quantity supplied
When supply curve horizontal
Elasticity is infinite
Types of taxes
Specific tax (fixed dollar levy per unit sold)
Ad valorem type (percentage levy)
tax incidence
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
tax supply with elastic supply
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
elasticities using slope of supply or demand curve
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
