Chapter 6: Elasticity Flashcards
What is elasticity of demand?
the responsiveness (or sensitivity) of consumers to a price change
What is the formula for Ed
(percentage change in quantity demanded)/(percentage change in price)
What is percentage change defined as?
(change in value)/(original value)
How do u use the midpoint formula to calculate elasticity?
(change in quantity/sum of quantities/2)/(change in price/sum of prices/2)
What is elastic demand?
Demand is elastic if a specific percentage change in price results in a larger change in quantity demanded. In such cases, Ed is greater than 1
What is inelastic demand?
if a specific percentage change in price produces a smaller percentage change in quantity demanded, demand is inelastic. In such cases, Ed is less than 1.
What is unity elasticity?
the case separating elastic and inelastic demand occurs when a percentage change in price and the resulting percentage change in quantity demanded are the same. This special case is termed unit elasticity because Ed is exactly 1 or unity.
When is demand perfectly inelastic?
When a price change results in no change whatsoever in the quantity demanded, economists say that demand is perfectly inelastic. The price elastic coefficient is zero because there is no response to a change in price.
When is demand perfectly elastic?
Where a small price reduction causes buyers to increase their purchases from zero to all they can obtain, the elasticity coefficient is infinite and economists say that demand is perfectly elastic
What is Total Revenue (TR) and how do you calculate it?
the total amount the seller receives from the sale of a product in a particular time period; it is calculated by multiplying the product price (P) by the quantity sold (Q)
When is demand elastic according to the total-revenue test?
If total revenue changes in the opposite direction from price
When is demand inelastic according to the total-revenue test?
if total revenue changes in the same direction of price
When is demand unit-elastic according to the total-revenue test?
if total revenue does not change when price changes
What effect will a decrease in price have if demand is elastic?
increase total revenue
What effect will an increase in price have if demand is elastic?
reduce total revenue
What effect will a decrease in price have if demand is inelastic?
reduce total revenue
What effect will an increase in price have if demand is inelastic?
increase total revenue
What is sustainability?
generally, the larger the number of substitute goods that are available, the greater the price elasticity of demand
What is proportion of income?
ceteris paribus, the higher the price of a good relative to consumer’s income, the greater the price elasticity of demand
What is luxuries versus necessities?
In general, the more that a good is considered to be a “luxury” rather than a “necessity”, the greater is the price elasticity of demand
What is time?
generally, product demand is more elastic the longer the time period under consideration
How do you calculate the supply elasticity coefficient?
(percentage change in quantity supplied)/(percentage change in price)
What does the degree of price elasticity of supply depend on?
how easily– and therefore quickly– producers can shift resources between alternative uses
What is the immediate market period?
the length of time over which producers are unable to respond to a change in price with a change in quantity supplied
What is the short run?
a period of time too short to change plat capacity but long enough to use the fixed-size plant more or less intensively
What is the long run?
a time period long enough for firms to adjust their plant sizes for new firms to enter (or existing firms to leave) the industry
What is the total-revenue-test for elasticity of supply?
Trick question - there is none
What does cross elasticity of demand measure?
how sensitive consumer purchases of one product are to a change in the price of some other product
How do you calculate the cross elasticity of demand coefficient?
(percentage change in quantity demanded of Product X)/(percentage change in price of product Y)
What are substitute goods?
if cross elasticity of demand is positive, meaning that sales of X move In the same direction as a change in the price of Y, then X and Y are substitute goods
What are complementary goods?
when cross elasticity is negative, we know that X and Y “go together”; an increase in the price of one decreases the demand for the other. So the two are complementary foods.
What are independent goods?
a zero or near-zero cross elasticity suggests that the two products being considered are unrelated or independent goods
What does income elasticity of demand measure?
the degree to which consumers respond to a change in their incomes by buying more or less of a particular good
How do you calculate the income elasticity of demand coefficient?
(percentage change in quantity demanded)/(percentage change in income)
What are normal goods?
for most goods, the income-elasticity coefficient Ei is positive, meaning that more of them are demanded as incomes rise. Such goods are called normal or superior goods.
What are inferior goods?
a negative income-elasticity coefficient designates an inferior good
