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1.c ME Class 2- 2024/2025 > Chapter 5 > Flashcards

Chapter 5 Flashcards

1
Q

What is price elasticity of demand (PED)

A

The responsiveness of the quantity demanded of a good to a change in its price.

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2
Q

What is the formula for price elasticity of demand

A

%ChangeinPrice /
%ChangeinQuantityDemanded
​

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3
Q

What is an example of PED

A

If a 10% increase in the price of ice cream causes the quantity demanded to decrease by 20%, the PED is
−2 (elastic demand).

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4
Q

What determines the price elasticity of demand

A
  1. availability of substitutes
  2. necessities vs luxuries
  3. definition of the market
  4. time horizon
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5
Q

explain availability of substitutes

A

Goods with more substitutes tend to have more elastic demand.

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6
Q

explain Necessities vs Luxuries

A

Necessities tend to have inelastic demand, while luxuries have elastic demand.

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7
Q

explain definition of the market

A

Narrowly defined markets tend to have more elastic demand than broadly defined markets.

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8
Q

explain time horizon

A

Demand is more elastic in the long run than in the short run.

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9
Q

What is total revenue and price elasticity of demand

A

Total Revenue (TR): The total amount of money a firm receives from sales (TR=Price×Quantity)

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10
Q

What is the formula for total revenue and price elasticity

A

TR=Price×Quantity).

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11
Q

What is elastic demand

A

If demand is elastic, a price increase reduces total revenue.

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12
Q

What is inelastic demand

A

If demand is inelastic, a price increase increases total revenue.

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13
Q

What is Income Elasticity of Demand (YED)

A

The responsiveness of the quantity demanded to a change in consumer income.

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14
Q

What is the formula for
IncomeElasticityofDemand

A

IncomeElasticityofDemand
=%ChangeinQuantityDemanded/
%ChangeinIncome

Example: If a 10% increase in income causes the quantity demanded of a normal good to increase by 15%, the YED is
1.5

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15
Q

What is Cross-Price Elasticity of Demand (XED)

A

The responsiveness of the quantity demanded of one good to a change in the price of another good.

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16
Q

What is the formula for Cross-PriceElasticityofDemand

A

Cross-PriceElasticityofDemand=
%ChangeinQuantityDemandedofGood1 /
%ChangeinPriceofGood2

Example: If a 5% increase in the price of coffee causes a 10% increase in the quantity demanded of tea, the XED is
2
2 (substitutes).
​

​

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17
Q

what is Price Elasticity of Supply (PES)

A

The responsiveness of the quantity supplied of a good to a change in its price.

18
Q

What is the formula for PES

A

PriceElasticityofSupply=%ChangeinQuantitySupplied / %ChangeinPrice

Example: If a 15% increase in the price of oranges leads to a 30% increase in the quantity supplied, the PES is
2 (elastic supply)

19
Q

What are the determinantes of price elasticity of supply

A
  1. flexibility of producers
  2. time horizons
20
Q

What is Flexibility of Producers

A

Flexibility of Producers: Goods that can be easily produced or stored have more elastic supply.

21
Q

What is Time Horizon

A

Time Horizon: Supply is more elastic in the long run than in the short run.

22
Q

Explain elasticity and tax incidence

A

Tax Incidence: The manner in which the burden of a tax is shared among participants in a market.

Inelastic Demand or Supply: When demand or supply is inelastic, the tax burden falls more on the side of the market that is less elastic.

Example: If the government imposes a tax on gasoline and the demand for gasoline is inelastic, consumers will bear most of the tax burden.

23
Q

Explain elasticity and price controls

A

Price Ceilings and Floors: Elasticity helps to understand the effects of price controls like ceilings (maximum prices) and floors (minimum prices).

Example: Rent control (a price ceiling) in a city with inelastic supply of housing can lead to shortages and reduced quality of housing.

24
Q

Explain elasticity in international trade

A

Trade Policies: Elasticity of demand and supply can influence the effects of tariffs and quotas on international trade.

Example: A tariff on imported goods will have different effects on total revenue and domestic market depending on the elasticity of demand and supply for those goods.

25
Q

Luxury Cars vs. Salt:

A

Luxury Cars: High price elasticity of demand because they are not necessities and have many substitutes.

Salt: Low price elasticity of demand because it is a necessity with few substitutes.

26
Q

Gasoline Prices:

A

Short Run: Inelastic demand because consumers cannot easily change their consumption habits.
Long Run: More elastic demand as consumers can switch to more fuel-efficient cars or alternative transportation.

27
Q

Agricultural PRoducts

A

Supply Elasticity: Inelastic in the short run because of the time needed to grow crops, but more elastic in the long run as farmers can adjust their planting decisions.

28
Q

microeconomics

A

the study of how households and firms make decisions and how they interact in markets

29
Q

Macroeconomics

A

the study of economy-wide phenomena, including inflation, unemployment, and economic growth

30
Q

Gross domestic product (GDP)

A

the market value of all final goods and services produced within a country in a given period of time

31
Q

What is the formula for GDP

A
32
Q

consumption

A

spending by households on goods and services with the exception of purchases of new housing

33
Q

Investment

A

spending on capital equipment, inventories, and structures, including household purchases of new housing

34
Q

government purchases

A

spending on goods and services by local, territorial, provincial, and federal governments

35
Q

nominal GDP

A

the production of goods and services valued at current prices

36
Q

real GDP

A

the production of goods and services valued at constant prices

37
Q

GDP deflator

A

a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100

38
Q

formulas

A
39
Q

formulas

A
40
Q
A

1.c ME Class 2- 2024/2025 (10 decks)

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