Chapter 5 - Elasticity & Its Applications Flashcards

1
Q

Elasticity

A

Elasticity measures how much one variable responds to changes in another variable.
Or
Elasticity is a numerical measure of the responsiveness of Qd & Qs to one of its determinants

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2
Q

Price Elasticity of Demand

A

PEoD = (% change in Qd / % change in P)

  • PEoD measures how much Qd responds to a change in P.
  • it measures price sensitivity of buyers demand
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3
Q

Determinants of price elasticity

A
  • Price Elasticity is higher when close substitutes are available
  • Price Elasticity is higher for narrowly defined goods than for broadly defined ones
  • Price Elasticity is higher for luxuries than for necessities
  • Price Elasticity is higher in the long run than the short run
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4
Q

Total revenue

A

Revenue = P * Q

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5
Q

Price Elasticity of Supply

A

PEoS = (% change in Qs / % change in P)

  • PEoS measures how much Qs responds to a change in P
  • it measures sellers’ price-sensitivity
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6
Q

Determinants of Supply Elasticity

A

The more easily sellers can change the quantity they produce, the greater the price Elasticity of supply

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7
Q

Income Elasticity of demand

A

Measures the response of Qd to a change in consumer income

IEoD = % change in Qd / % change in income

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8
Q

Cross-price Elasticity of demand

A

Measures the response of demand for one good to changes in the price of another good

Cross-price Elasticity of demand = % change in Qd for good 1 / % change in price of good 2

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