Chapter 5: Elasticity and its Application Flashcards
Define ‘Elasticity’.
A measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants.
Define ‘Price elasticity of demand’.
A measure of how much the quantity demanded of a good responds to a change in the price of the good.
E=%Q/%P
*Recall Midpoint Method
Define ‘Total revenue (in a market)’.
The amount paid by buyers and received by sellers of a good.
R=P*Q
Define ‘Income elasticity of demand’.
A measure of how much the quantity demanded of a good responds to a change in consumers’ income.
E=%Q/%Income
*Recall Midpoint Method
Define ‘Cross-price elasticity of demand’.
A measure of how much the quantity demanded of one good responds to a change inn the price of another good.
E=%Q(1)/%P(2)
*Recall Midpoint Method
Define ‘Price elasticity of supply’.
A measure of how much the quantity supplied of a good responds to a change in the price of that good.
E=%Q/%P
*Recall Midpoint Method
What effects the price elasticity of demand?
Demand tends to be more elastic if close substitutes are available, if the good is a luxury rather than a necessity, if the market is narrowly defined, or if buyers have substantial time to react to a price change.
When is demand elastic? Inelastic?
If quantity demanded moves proportionately less than the price, then the elasticity id less than 1 and demand is said to be inelastic (more vertical). If quantity demanded moves proportionally more than price, then the elasticity is greater than 1 and demand is said to be elastic (more horizontal).
How does total revenue respond to demand curves?
For inelastic demand curves, total revenue moves in the same direction as the price. For elastic demand curves, total revenues moves in the opposite direction of the price.
What do negative and positive values for income elasticity of demand mean?
Because quantity demanded and income move in the same direction, normal goods have positive income elasticities. Because quantity demanded and income move in opposite directions, inferior goods have negative elasticities.
What do negative and positive values for cross-price elasticity of demand mean?
Because price and the quantity demanded move in the same direction, substitutes have positive cross-price elasticities. Because increase in price reduces the quantity demanded, complements have negative cross-price elasticities.
What effects the price elasticity of supply?
This elasticity often depends on the time forizon under consideration. In most markets, supply is more elastic in the long run.
When is supply elastic? Inelastic?
If quantity supplied moves proportionately less than the price, then the elasticity is less than 1 and supply is said to be inelastic (more vertical). If quantity supplied moves proportionately more than the price, then the elasticity is greater than 1 and supply is said to be elastic (more horizontal).
What is the midpoint method?
A better way to calculate percentage changes and elasticities.
(X2 - X1) / [(X2 + X1) / 2]
