Chapter 5 Vocab - Elasticity and Its Applications Flashcards
Define: Elasticity of demand
Measures how responsive the quantity demanded is to a change in price; more responsive equals more elastic.
The more and the better substitutes for a good, the more ___________ the demand.
elastic
List the factors of goods whose demand is less elastic
- Fewer substitutes
- Short run (less time)
- Categories of product
- Necessities
- Small part of budget
List the factors of goods whose demand is more elastic
- More substitutes
- Long run (more time)
- Specific brands
- Luxuries
- Large part of budget
How to calculate elasticity of demand
Percentage change in the quantity demanded divided by the percentage change in price
Formula for elasticity of demand
When I Ed I > 1 the demand is ___________
Elastic
When I Ed I = 1 the demand is ___________
Unit elastic
When I Ed I < 1 the demand is ___________
Inelastic
Define: Total revenue
Price per unit times quantity sold
(TR = P * Q)
If the demand curve is inelastic, price and revenue move ___________
together
If the demand curve is elastic, price and revenue move ___________
in opposite directions
If the demand curve is unit elastic, when price changes, revenue ___________
stays the same
Define: Elasticity of supply
Measures how responsive the quantity supplied is to a change in price
The supply of raw materials is often ___________
inelastic
Local supply of a good is much more ___________ than global supply of a good.
elastic
List the factors of goods whose supply is less elastic
- Difficult to increase production at constant unit cost (ex: some raw materials)
- Large share of market for inputs
- Global supply
- Short run
List the factors of goods whose supply is more elastic
- Easy to increase production at constant unit cost (ex: some manufactured goods)
- Small share of market for inputs
- Local supply
- Long run
How to calculate elasticity of supply
Percentage change in the quantity supplied divided by the percentage change in price
Formula for elasticity of supply
