Chapter 5 Flashcards
Elasticity
Elasticity is a measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants.
For example, the concept of elasticity helps economists to measure the quantitative changes brought about by a shift in the demand or supply curve.
Price elasticity of demand
is a measure of how much the quantity demanded of a good responds to a change in the price of that good, calculated as the percentage change in quantity demanded divided by the percentage change in price.
For example, using the price elasticity of demand, firms can determine how a change in the market price will effect industry revenue.
When is demand for good elastic or inelastic?
- Demand for good is ELASTIC if the quanlity
demanded responds substanstially to changes in the
price (> 1) (Sensitive) - Demand for good is INELASTIC if the quanlity
demanded responds only slightly to changes in the
price (< 1) (Insensitive)
How do we know whether a good is elastic or inelastic?
Computing the price elasticity of demand
Mid-Point Method
Perfectly inelastic and elasticc demand curves
Inelastic demand
Unit elastic demand
Elastic demand
Price Elasticity and Its Determinants
- You should check the concepts of close substitutes, and luxury goods and necessities.
- The authors say that a market is dependent on how we draw it and also on the time horizon.
- Simple definiton (mine) is: A market is where there are buyers and sellers and a willingness to exchange.
Demand and Total Revenue
Its calculation is P x Q
Price and total revenue with inelastic demand
Inelastic demand
Price increases, Total revenue increases.
Price falls, Total revenue falls.
Price and total revenue with inelastic demand:
Price and total revenue with elastic demand
Elastic demand
Price increases, Total revenue falls.
Price falls, Total revenue increases.
Price and total revenue with elastic demand
