Chapter 5 Flashcards
What is Price of Elasticity Demand
Price elasticity of demand = % change in quantity demanded / % change in price
Mindpoint method formula
(Q2-Q1)/[(Q2+Q1)/2] / (P2-P1)/[(P2+P1)/2]
Factors that determine the price elasticity of supply
- Time
- Scarcity and sophistication of inputs and technology
The price elasticity of demand depends on?
- availability of close substitutes
- proportion of income spent on the good
- amount of time buyers have to respond to the price change.
When price in demand is elastic (Ed > 1)
Increase in price = reduces total revenue
Reduction in price = Increases total revenue
When price in demand is inelastic (Ed < 1)
Increase in price = Increase total revenue
Reduction in price = reduces total revenue
The cross-price elasticity of demand
Ec = % change in QD of Good / % change in price of related Good
What does the cross-price elasticity of demand measure
The impact that a price change of one good will have on the quantity demanded of another good at a given price.
Income elasticity of demand
% change quantity demanded / % change income
What does the elasticty of demand measure
The responsiveness of the quantity demanded of a good to a change in income.
If the income elasticty is positive
Then the good in question is a normal good
If the income elasticty is negative
Then the good is an inferior good
The price elasticity of supply measures?
The price elasticity of supply measures the relative change in the quantity supplied that results from a change in price.
What is the price elasticity of supply
% change quantity supplied / % change price
What is tax incedince
Tax incidence is the analysis of the effect of a particular tax on the distribution of economic welfare.
