Chapter 5 - Elasticity and its Application Flashcards
What is Elasticity?
A measure of how much buyers and sellers respond to changes in market conditions.
A measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants.
What is Price elasticity of Demand?
A measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price.
What influences the elasticity of Demand?
Availability of close substitutes, necessities versus luxuries, definition of market, time horizon.
Formula for Price elasticity of Demand?
$ elasticity of demand = % change in quantity demanded / % change in $
$ elasticity of demand = {(Q2 - Q1) / [(Q2 + Q1) / 2]} / {(P2 - P1) / [(P2 + P1) / 2]}
The variety of Demand Curves?
Demand is ELASTIC when the elasticity is GREATER than 1, so that quantity moves proportionately more than the price.
Demand is INELASTIC when the elasticity is LESS than 1, so that quantity moves proportionately less than the price.
if the elasticity is EXACTLY 1, so that quantity moves the same amount proportionately as price, demand is said to to have unit elasticity.
What is Total Revenue and how do you calculate it?
Total Revenue - is the amount paid by buyers and received by sellers of a good, computed as the price of good times the quantity sold.
Total Revenue = Price x Quantity
What is Price elasticity of Supply?
A measure of how much quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price.
How does one determine whether a supply of a good is elastic or inelastic?
Elastic if the quantity of quantity supplied responds substantially to changes in the price.
Inelastic if the quantity supplied responds only slightly to changes in price.
Supply is usually more elastic in the long run than in the short run.
How to compute Price elasticity of Supply?
Price Elasticity of Supply = % Change in Quantity Supplied / % change in $
How to compute Price elasticity of Supply?
Price Elasticity of Supply = % Change in Quantity Supplied / % change in $
