Chapter 6 (6.3-6.6) Flashcards
Substitutability and price elasticy of demand with example
larger number the substitute goods available, greater the price elasticity of demand. Ex Candy Bars, glasses or contacts inelastic
proportion of income and price elastic of demand with example
greater the proportion of income spent on goods, greater the price elasticity of demand. Ex price increase in gum is a small change on consumer income= inelastic
ex price increase on automobile insurance is big change on consumer income therefore is elastic
Luxury Goods
Elastic ex car, vacation,
Necessity Goods
Inelastic ex gas, electricity, internet
Time
longer period under construction= more elastic. Consumers need time to adjust to prices
Large Crop Yields
Most farm products inelastic. Increase in supply affects price and TR negatively. Elastic if production restricted
Sales Tax and government
Governments put taxes on necessities and inelastic goods and services gain highest Total Revenue. Tax on elastic goods=less revenue
Decriminalization of Illegal Drugs
demand of addicts are inelastic, demand for drugs are elastic
Price Elasticity of supply
measures responsiveness of quantity supplied to a change in price
elastic supply
producers responsive to price change
inelastic supply
producers unresponsive to price change
Es percent formula
percent change in quantity supplied of product x / percentage change in price of product x
Can Elasticity of Supply be negative
no
Es > 1
supply elastic %change in QS > %change in price
Es = 1
supply is unit elastic %change in QS = %change in price
Es < 1
supply is inelastic %change in QS < %change in price
Elasticity of supply depends on how easily……
quick=
slow=
suppliers can shift resources to alternative uses
quick=elastic
slow=inelastic
Immediate Market Period
length of time over which produces are unable to respond to change in price with a change in quantity supplied (perfectly inelastic)
Short Run and elasticity of supply
period too short to change plant capacity but long enough to current plant capacity more or less intensively. More elastic than immediate market period
Long run and elasticity of supply
period long enough for firms to adjust their plant sizes and for firms to enter or exit industry
is there a total revenue test for elasticity of supply
no
supply relationship with price
supply shows direct relationship between price and amount supplied.
Antiques and elasticity of supply
higher price in antique is from strong demand, limited supply therefore is inelastic.
Reproductions (designed to look antique)
elastic supply, increase in demand raises price slightly and so companies supply more
Volatile Gold prices
supply of gold inelastic because increase or decrease in price does not yield more or less gold supplied
cross elasticity of demand Exy
measures how responsive consumer purchases of one product x are to a change in price of some product y
Exy > 0 (positve)
substitute goods: sales of product x move in same direction as y price
Exy < 0 (negative)
complementary goods: quantity demanded of product x is opposite to change in price of y
Exy is near equalling 0
independent good: goods are unrelated
Income Elasticity of Demand
measures degree to which consumers demands change with respect to change in their income
income elasticity positive
normal good: more demanded as income rises
income elasticity negative
inferior goods: less demanded as income rises
Income Elastic Insights
High income elasticities (luxury) affected by recession
Low income inelasticities (necessities) least affected by recession
( Income falls, we cannot stop buying necessities but we can stop buying luxuries)
Incident of a tax with demand
inelastic demand results in tax burden on consumer
elastic demand results in tax burden on producer
incident of a tax with supply
inelastic supply results in tax burden on producer
elastic supply results in tax burden on consumer
Efficiency Loss of a Tax
deadweight, tax reduces production and consumption below their economic efficiency
