Chapter 5 - Elasticity and Its Application Flashcards
1
Q
Elasticity
A
- a numerical measure of how much one variable responds to changes in another variable
- e.g. how responsive is QD (or QS) to a change in one of its determinants
2
Q
Elasticity of X and Y
A
- measures how much X responds to a change in Y
- Elasticity of X and Y = %change in X/%change in Y
3
Q
Price Elasticity of Demand
A
% change in Qd/% change in P
4
Q
Midpoint Method (for calculating percent change)
A
= end value - start value/midpoint x 100
Midpoint: the number halfway between the start and end values
5
Q
Determinants of Price Elasticity
A
- the extent to which close substitutes are available
- how broadly or narrowly the good is defined
- Whether the good is a necessity or luxury
- long-run v. short-run
6
Q
Examples of Elasticity
A
- higher when close substitutes are available
- higher for narrowly defined goods
- higher for luxuries than for necessities
- higher in the Long-Run than the Short-Run
7
Q
Variety of Demand Curves
A
- The flatter the demand curve the larger the elasticity
- vice versa
8
Q
Perfectly Inelastic Demand
A
E = 0
- demand curve is vertical
- Price sensitivity is none
9
Q
Inelastic Demand
A
0
10
Q
Unit Elastic Demand
A
E = 1
- demand curve is intermediate slope
- price sensitivity is proportional
11
Q
Elastic Demand
A
E > 1
- demand curve is relatively flat
- price sensitivity is relatively high
12
Q
Perfectly Elastic Demand
A
E = infinite
- demand curve is horizontal
- price sensitivity is extreme
13
Q
Price Elasticity of Supply
A
- measures how much quantity supplied responds to a change in price
% change in Qs / % change in P
14
Q
Variety of Supply Curves
A
- the flatter the supply curve the large the elasticity
- vice versa
15
Q
Perfectly Inelastic (Supply)
A
E = 0
Supply Curve: vertical
Price Sensitivity: None
