CHAPTER 5 Flashcards
what is elasticity
measures how much quantity demanded responds to change in price
What is inelastic demand
small response in quantity demanded when price rises
value is less than 1
consumers have a low willingness to shop elsewhere
what is elastic demand
large response in quantity demanded when price rises
value is greater than 1
consumers have a high willingness to shop elsewhere
what is elasticity formula
price elasticity of demand =
percentage change in quantity demand /
percentage change in price
Unit elastic
value equal to 1
what is perfectly inelastic demand
price elasticity of demand equals 0 ; quantity demanded does not respond to change in price
Vertical line on graph
What is perfectly elastic demand
price elasticity of demand equals infinity; quantity demanded has an infinite response to any change in price
horizontal line on graph
More substitutes mean what
greater elasticity of demand
Total revenue formula
TR = P x Q
What happens if demand for a product is elastic
Total revenue increases
the percentage increase in quantity is greater than the percentage decrease in price.
What happens if a product is inelastic
Total revenue decreases
the percentage increase in quantity is less than the percentage decrease
Elasticity supply
measures by how much quantity supplied responses to change in price
inelastic supply
small response in quantity supplied when price rises
elastic supplied
large response in quantity supplied when price rises
Perfectly inelastic supply
value equals exactly 0
vertical line on graph
perfectly elastic supply
infinite value
horizontal line on graph
Elasticity of supply formula 1 midpoint formula
percentage change in quantity supplied /
percentage change in price
Q1 -Q0 / (Q1+Q0 /2)
/
P1-P0 / (P1+P1/2)
Cross elasticity of supply formula
percentage change in quantity demanded /
percentage change in price of a substitute or complement
Q1 -Q0 /
(Q1+Q0/2)
/
P1-P0 /
(P0+P1)/2
What is cross elasticity of supply
measures the responsiveness of the demand for a product to a change I the price of a substitute or complement
Substitutes cross elasticity
positive value
complements
negative value
income of elasticity of demand
measures the responsiveness of the demand for a product or service to a change in income
income elasticity of demand formula
percentage change in quantity demanded /
percentage change in income
normal good
positive value
inferior good income elasticity
negative value
income inelastic demand
positive value less than 1
income elastic demand
positive value greater than 1
What influences price elasticity of demand
Time to adjust
Substitutes
Proportion of income spend on a product— greater proportion of income means spent more elastic demand
When is total revenue decreased when price is raised slightly
When Demand is elastic
When is totally revenue increased when price is raised slightly
When demand is inelastic
When priced is lowered slightly and total revenue is increased what is demand
Elastic
What is an important factors affecting price elasticity of supply
- The length of time at the producers disposal
- availability of additional inputs - more available inputs means more elastic supply
Like products that have shorter times for Production have a more elastic supply
Elasticity of supply formula
Percentage change in quantity supplied /
Percentage change in price
If the percentage change in supplied is less than the percentage change in price the elasticity of supply is inelastic. Quantity supplied is unresponsive to change in price
How to get % change in quantity supplied
Elasticity of supply x % change in price
Finding percentage change
Subtract earlier value from new one,
Divide the new number (difference) from first value and multiply by 100
Who pays tax when demand is inelastic
The buyers
Who pays tax when demand is elastic
The sellers
Who pays the tax when supply is inelastic
The sellers
Who pays the tax when supply is elastic.
Smaller portion paid by Buyers
If demand is perfectly elastic who pays tax
Entirely by producers
If demand is perfectly inelastic who pays tax
Entirely the consumer
If supply is perfectly inelastic who pays the tax
Entirely by Producers
If supply is perfectly elastic who pays the tax
The consumer
Elasticity and tax
Smaller portion of tax paid by producer when demand is inelastic buyers pay more
The more elastic demand is producer or seller pays more tax buyers pay less
The more elastic supply is the more seller pay tax buyers pay less
The more inelastic supply is the buyers pay more tax seller pay less
A straight line demand curve
Price elasticity if demand decreases
