Chapter 6 - Elasticity Flashcards
What does elasticity imply?
Responsiveness / sensitivity
With what is price elasticity of demand concerned?
The sensitivity of the Quantity demanded to a change in the Price of a product
In the case of demand curve which is the dependent variable?
The quantity demanded
In the case of a demand curve, which is the independent variable?
Price of the product
What is price elasticity of demand?
The % change in the quantity demanded if the price of the product changes by 1%, Ceteris paribus
Elasticity is calculated by using % changes. Are these changes relative changes or absolute changes?
Relative changes.
The price elasticity of demand is the ratio of the % change in the quantity demanded to the % change in price. What is this ratio called?
Elasticity coefficient
What does the elasticity coefficient enable us to do?
Compare how consumers react to changes in the price of diff goods & services
Perfectly inelastic demand = ?
0
Inelastic demand lies between?
0 and 1
Unitarily elastic demand = ?
(When the % change in quantity is = to the % change in price)
1
Elastic demand = ?
Between 1 and never ending
Perfect elastic demand =
Infinity
What 10 factors determine the price elasticity of demand?
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1) substitution possibilities
2) degree of complimentary value
3) type of want satisfied
4) time period considered
5) proportion of income spent
6) definition of the product
7) advertising
8) durability
9) number of uses for product
10) addiction
Which is the most crucial factor in price elasticity?
The substitutability of the product
What are goods with a negative income elasticity called?
Inferior goods
When is a good considered to be a luxury item in terms of elasticity?
When the income elasticity of demand is greater than 1
What does the income elasticity of demand measure?
The responsiveness of the quantity demanded to changes in income.
When is a good considered a essential good?
When the income elasticity of demand is positive but less than 1 or the % change in the quantity demanded is smaller than the % change in income.
What does the cross elasticity of demand measure?
The responsiveness of the quantity demanded of a particular good to changes in the price of related goods.
What does it mean when there is inelasticity in demand?
Consumers do not care much when prices change.
When producers are faced with an inelastic demand for their product should there be incentive to raise or drop prices?
Raise prices. The % fall in quantity demanded would be less that the % increase in the price.
What does an elastic demand mean?
Consumers react greater to price changes - more sensitive
What should producers do to increase their revenue when faced with an elastic demand to price changes?
Lower their prices.
