Chapter 5 - Elasticity & Its Applications Flashcards
Elasticity
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
Price Elasticity of Demand
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
Determinants of price elasticity
- 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
Total revenue
Revenue = P * Q
Price Elasticity of Supply
PEoS = (% change in Qs / % change in P)
- PEoS measures how much Qs responds to a change in P
- it measures sellers’ price-sensitivity
Determinants of Supply Elasticity
The more easily sellers can change the quantity they produce, the greater the price Elasticity of supply
Income Elasticity of demand
Measures the response of Qd to a change in consumer income
IEoD = % change in Qd / % change in income
Cross-price Elasticity of demand
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