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Microeconomics > Chapter 6: Elasticity > Flashcards

Chapter 6: Elasticity Flashcards

1
Q

Define elasticity

A

A measure of the sensitivity of one variable to changes in another variable

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2
Q

Define price elasticity of demand (PED)

A

A measure of the sensitivity of quantity demanded to a change in the price of a good or service

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3
Q

What’s the formula for PED?

A

% change in quantity demanded / % change in price

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4
Q

Define elastic

A

A term used when the price elasticity of demand is greater than 1 but less than infinity

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5
Q

Define inelastic

A

A term used when the price elasticity of demand is less than 1 but greater than 0

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6
Q

Is PED always negative?

A

Yes

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7
Q

Define unit elastic

A

A term used when the price elasticity of demand is equal to 1

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8
Q

Draw a diagram illustrating how the price elasticity of demand varies along a straight line

A

Figure 6.2

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9
Q

Why may firms have an interest in PED?

A

If they are considering changing their prices they will be eager to know the extent to which demand will be affected

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10
Q

Draw a diagram illustrating both elasticity and total revenue

A

Figure 6.4

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11
Q

When PED is elastic, for a price increase what happens to total revenue?

A

It falls

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12
Q

When PED is elastic, for a price decrease what happens to total revenue?

A

It rises

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13
Q

When PED is unit elastic, for a price increase what happens to total revenue?

A

It does not change

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14
Q

When PED is unit elastic, for a price decrease what happens to total revenue?

A

It does not change

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15
Q

When PED is inelastic, for a price increase what happens to total revenue?

A

It rises

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16
Q

When PED is inelastic, for a price decrease what happens to total revenue?

A

It falls

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17
Q

What can a firm do if it is aware of the PED of its product?

A

It can anticipate consumer response to its price changes which may be a powerful strategic tool

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18
Q

Draw a diagram illustrating perfectly elastic and perfectly inelastic demand

A

Figure 6.5

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19
Q

What’s the most important influence on PED?

A

The availability of substitutes for the good or service under consideration

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20
Q

If a good is a necessity then what is demand?

A

Inelastic

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21
Q

If a good is a luxury then what is demand?

A

Elastic

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22
Q

Name 2 other influences on PED

A
  1. The relative share of the good or service in overall expenditure
  2. Time period
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23
Q

Why is PED always negative?

A

There is an inverse relationship between quantity demanded and price

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24
Q

If PED is smaller than -1, demand is said to be?

A

elastic

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25
Q

If PED is between 0 and -1 demand is said to be

A

Inelastic

26
Q

Name the 4 things the size of the PED is influenced by?

A
  1. Availability of substitutes
  2. Whether it is a luxury or necessity
  3. The relative share of expenditure on the good in the consumers budget
  4. The time period that consumers have to adjust
27
Q

Define income elasticity of demand

A

A measure of the sensitivity of quantity demanded to a change in consumer incomes

28
Q

What is income elasticity of demand also known as

A

YED

29
Q

What is the formula for income elasticity of demand?

A

% change in quantity demanded / % change in consumer income

30
Q

What value may YED be?

A

Positive or negative

31
Q

For normal goods what is the value of YED?

A

Positive

32
Q

For inferior goods what is the value of YED?

A

Negative

33
Q

Define superior goods

A

One for which the income elasticity of demand is positive, and greater than 1, such that as incomes rise, consumers spend proportionately more on the good

34
Q

Describe a YED of below -1

A

Elastic inferior good

35
Q

Describe a YED of between -1 and 0

A

Inelastic inferior good

36
Q

Describe a YED of 0

A

No relationship between income and quantity demanded

37
Q

Describe a YED of between 0 and 1

A

Inelastic normal good

38
Q

Describe YED of above 1

A

Elastic normal good - also known as a superior-good

39
Q

Define cross elasticity of demand

A

A measure of the sensitivity of quantity demanded of a good or service to a change in the price of some other good or service

40
Q

What’s the abbreviation for cross elasticity of demand

A

XED

41
Q

What’s the formula for XED

A

% change in quantity demanded of good X / % change in the price of good Y

42
Q

What does it mean if XED is positive?

A

An increase in the price of good Y leads to an increase in the quantity demanded of good X

43
Q

What does a high value of XED indicate?

A

Two goods are very close substitutes

44
Q

What does a negative value of XED indicate?

A

Two goods are likely to be complements

45
Q

What does it mean if XED is negative?

A

An increase in the price of one good lead to a fall in the quantity demanded of another good

46
Q

What does it mean if XED is zero?

A

The goods concerned were unrelated

47
Q

Describe an XED of below -1

A

Strong complement

48
Q

Describe a XED of between -1 and 0

A

Weak complement

49
Q

Describe XED of 0

A

No relationship between the two goods

50
Q

Describe XED of between 0 and 1

A

Weak substitute

51
Q

Describe XED of above 1

A

Strong substitute

52
Q

What does the competition and market authority have the responsibility of?

A

Safeguarding consumer interests by ensuring that firms do not exploit excessive market power

53
Q

Define price elasticity of supply (PES)

A

A measure of the sensitivity of quantity supplied of a good or service to a change in the price of that good or service

54
Q

What’s the equation for Price elasticity of supply

A

% change in the quantity supplied / % change in price

55
Q

What will the value of the elasticity depend on?

A

How willing and able firms are to increase their supply

56
Q

Define perfectly inelastic supply

A

A situation in which firms can supply only a fixed quantity, so cannot increase or decrease the amount available: elasticity of supply is zero

57
Q

Define perfectly elastic supply

A

A situation in which firms will supply any quantity of a good at the going price: elasticity of supply is infinite

58
Q

Draw a diagram illustrating perfectly elastic and perfectly inelastic supply

A

Figure 6.7

59
Q

How is the PED informative?

A

It shows how buyers of the good are likely to respond to a price change

60
Q

What will YED help to do?

A

Forecast changing demand if real incomes are increasing, or if the economy is heading into a recession

61
Q

What does XED help with?

A

Anticipating changes in demand if the prices of other products are changing

62
Q

Why may PES be expected to be greater in the long run compared to the short run?

A

Firms have more flexibility to adjust their production decisions in the long run

Microeconomics (18 decks)

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