Chapter 5 (ELASTICITY) Flashcards

1
Q

Elasticity

A

How Qd and Qs respond to change

  • responsiveness
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2
Q

Elasticity of Demand

A
  • Inelastic Demand: small response in Qd when price rises (>1)
  • Elastic Demand: large response in Qd when price rises
    (<1)

Price Elasticity of Demand: %change in Qd / %change in P

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3
Q

Perfectly inelastic and elastic Demand

A
  • perfectly inelastic demand: price elasticity of demand EQUALS 0, quantity demanded remains constant in price
    (Perfectly vertical on graph)
  • perfectly elastic demand: price elasticity of demand EQUALS infinity, Qd has an infinite response to any change in price
    (Perfectly horizontal on graph)
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4
Q

Factors that make demand more elastic

A
  • more and better substitutes available
  • the larger time to adjust to a price rise
  • the greater the proportion of income spent on a product
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5
Q

Total revenue and demand

A
  • elastic demand: price CUTS is the smart choice and increase total revenue
  • inelastic demand: price RISES is the smart choice and increases total revenue
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6
Q

Elasticity of Supply

A
  • inelastic of supply: small response in Qs when price rises (>1)
  • elastic of supply: large response in Qs when price rises (<1)

Elasticity of supply: % change in Qs / % change in P

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7
Q

Perfectly inelastic and elastic supply

A
  • perfectly inelastic supply: price elasticity of supply = 0, Qs remains constant when price changes
  • perfectly elastic supply: price elasticity of supply = infinity, Qs has infinite response to a change in price
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8
Q

Factors that affect elasticity of supply

A
  • depends on availability of additional inputs and the time production takes
  • allows more accurate predictions of future outputs and prices (smart choices), helping businesses avoid disappointing customers
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9
Q

Cross elasticity of demand

A
  • measures the responsiveness of the demand for a product or service to a change in the price of a substitue or complement
  • substitutes: a positive number
  • complements: a negative number
  • larger numbers for cross elasticity of demand mean more perfect substitutes or more perfect complements

Formula: % change Qd / % change P (related goods)

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10
Q

Income elasticity of demand

A
  • measures the responsiveness of the demand for a product or service to a change
  • normal goods: positive
    increase in income increases demand for normal goods
    Necessities (inelastic): % change in quantity < % change in income
    Luxuries (elastic): % change in quantity > % change in income
  • inferior goods: negative
    increase in income decreases demand for inferior goods
  • equation: % change in Qd / % change income
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11
Q

Tax incidence

A
  • the division of a tax between buyers and sellers
  • a tax on sellers shifts the supply curve by a vertical distance equal to the amount of the tax

Formula: tax per unit x units sold

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12
Q

Elasticity of Demand and tax incidence

A
  • perfectly inelastic demand = buyers pay all
  • more inelastic demand = buyers pay more
  • more elastic demand = sellers pay more
  • perfectly elastic demand = sellers pay all
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13
Q

Elasticity of supply and tax incidence

A
  • perfectly inelastic supply = sellers pay all
  • more inelastic supply = sellers pay more
  • more elastic supply = buyers pay more
  • perfectly elastic supply = buyers pay all
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