Chapter 5 - Elasticity Flashcards
Elasticity
Measures responsiveness of one variable to changes in another variable
Price elasticity
Ratio between the % change in quantity demanded or supplied and the % change in price
Price elasticity of demand
% change in demand divided by % change in price (always negative)
Price elasticity of supply
% change in supply divided by % change in price
Elastic
Elasticity > 1
Inelastic
Elasticity < 1
Unitary
Elasticity = 1 (extreme cases only)
Midpoint method
Used to calculate elasticity, obtains same elasticity between to price points whether there is a decrease or increase in price (uses same base for both cases)
Midpoint method equation
% change in quantity = Q1—Q2 / (Q1+Q2)/2 x 100
% change in price= P1—P2 / (P1+P2)/2 x 100
Infinite/perfect elasticity
Quantity demanded or supplied changes by an infinite amount in response to any change in price, supply and demand curve are horizontal, only in extreme cases
Zero elasticity
% change in any price results in no change to quantity, only in extreme cases, supply and demand curve vertical
Constant unitary elasticity
Price change of 1% results in quantity change of 1% (demand curve is a curved line, supply curve is a straight line)
Are necessities inelastic or elastic? Non-necessities?
Necessities are inelastic, non-necessities are more price-sensitive
Tax incidence
How the burden of tax is divided between consumers and producers
Who bears the burden of taxes? Consumers or producers?
- If demand is more inelastic than supply, consumers get most of the tax burden (demand remains relatively similar with price change)
- If supply is more inelastic than demand, sellers get most of the tax burden (sellers have to accept lower prices for their business)
