Chapter 5 - Elasticity and Its Application Flashcards
Elasticity
- 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
Elasticity of X and Y
- measures how much X responds to a change in Y
- Elasticity of X and Y = %change in X/%change in Y
Price Elasticity of Demand
% change in Qd/% change in P
Midpoint Method (for calculating percent change)
= end value - start value/midpoint x 100
Midpoint: the number halfway between the start and end values
Determinants of Price Elasticity
- 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
Examples of Elasticity
- 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
Variety of Demand Curves
- The flatter the demand curve the larger the elasticity
- vice versa
Perfectly Inelastic Demand
E = 0
- demand curve is vertical
- Price sensitivity is none
Inelastic Demand
0
Unit Elastic Demand
E = 1
- demand curve is intermediate slope
- price sensitivity is proportional
Elastic Demand
E > 1
- demand curve is relatively flat
- price sensitivity is relatively high
Perfectly Elastic Demand
E = infinite
- demand curve is horizontal
- price sensitivity is extreme
Price Elasticity of Supply
- measures how much quantity supplied responds to a change in price
% change in Qs / % change in P
Variety of Supply Curves
- the flatter the supply curve the large the elasticity
- vice versa
Perfectly Inelastic (Supply)
E = 0
Supply Curve: vertical
Price Sensitivity: None
Inelastic Supply
0
Unit Elastic Supply
E = 1
Supply Curve: intermediate slope
Price Sensitivity: proportional
Elastic Supply
E > 1
Supply Curve: relatively flat
Price Sensitivity: relatively high
Perfectly Elastic Supply
E = infinite
Supply Curve: horizontal
Price Sensitivity: extreme
Income Elasticity of Demand
- measures the response of Qd to a change in consumer income
% change in Qd / % change in income
Cross-Price Elasticity
- measures the response of demand for one good to changes in the price of another good
% change in Qd1 / % change in P2
