Chapter 5 Flashcards
What is price elasticity of demand?
The measure of how much quantity demanded responds to a change in price
What is inelastic demand?
A small response in quantity demanded when price rises
What is elastic demand?
A large response in quantity demanded when price rises
What is elasticity equal to?
The percentage change in quantity demanded divided by the percentage change in price
What does unit elastic mean?
The value of elasticity is equal to 1
When is demand perfectly inelastic?
When the quantity demanded doesn’t respond to a change in price, so elasticity equals 0
When is demand perfectly elastic?
When the quantity demanded has an infinite response to a change in price, so elasticity is infinite
What factors influence elasticity?
- Available substitutes
- Time to adjust
- Proportion of income spent on a product
What is total revenue? What is it equal to?
All the money a business receives from sales. Equal to price per unit multiplied by quantity sold
What is elasticity of supply?
The measure of how much quantity supplied responds to a change in price
What is inelastic supply?
A small response in quantity supplied when price rises
What is elastic supply?
A large response in quantity supplied when price rises
When is supply perfectly inelastic?
When the quantity supplied doesn’t respond to a change in price, so elasticity of supply equals 0
When is supply perfectly elastic?
When the quantity supplied has an infinite response to a change in price, so elasticity of supply is infinite
How does availability of inputs effect supply?
The more available a new input is the greater the elastic supply.
The less available a new input is the greater the inelastic supply
What is cross elasticity of demand?
A measure of the response of the demand for a product to a change in the price of a sub or comp
What is cross elasticity of demand equal to?
The percentage change in quantity demanded divided by the percentage change in price of a sub or comp
What does the sign of cross elasticity of demand mean?
It is positive for a substitute and negative for a complement
What is income elasticity if demand?
The measure of responsiveness of demand of a product or service due to a change in income
When is income elasticity of demand inelastic?
For normal goods that are necessities. The income elasticity of demand will be less than 1
When is income elasticity of demand elastic?
For normal goods that are luxuries. The income elasticity of demand will be greater than 1
What is a tax incident?
The division of a tax between buyers and sellers
How do tax incidents relate to price elasticity of demand?
The more inelastic the demand is, the more the buyers will pay. The more elastic the demand is, the more sellers pay
How do tax incidents relate to price elasticity of supply?
The more inelastic the supply is, the more sellers pay. The more elastic the supply is, the more buyers pay
