Chapter 6 - Elasticity Flashcards
Price Elasticity of Demand
The ratio of percent change in quantity demanded over the percent change in price
Elastic
Consumers change quantity demanded by a lot in response to price
Inelastic
Consumers do not change quantity demanded as much when price changes
-allows for greater profits by raising price
Midpoint Method
Calculates changes in variable compared with the average (midpoint) of the starting and final values.
-calculate midpoint twice, once for change in quantity demanded and once for change in the price of good.
Perfectly Inelastic Demand
when elasticity = 0, a vertical line on the graph
-represents no change in quantity demanded das price rises or falls
Perfectly Elastic Demand
when any price increase will cause quantity demanded to drop to 0, a horizontal line on a graph.
Rule of Thumb
elastic > 1, inelastic < 1, unit-elastic = 1
Total Revenue
price * quantity sold
Price Effect
After a price increase, each unit sold sells at a higher price, tends to raise revenue in INELASTIC case
Quantity Effect
After a price increase, fewer units are sold, tends to lower revenue, apparent in an ELASTIC case
Unit-Elastic (price/quantity effect)
An increase or decrease in price does not change total revenue
Inelastic (price/quantity effect)
Higher price increases total revenue, price effect > quantity effect. When price is lowered it reduces total revenue
Elastic (price/quantity effect)
An increase in price reduces total revenue, quantity effect > price effect. When price is lowered it increases total revenue
What Factors Determine the Price Elasticity of Demand
1) Is good necessity of luxury? (lower for necessities, higher for luxuries)
2) Availability of substitutes? (lower if no subs for that good)
3) share of income spent on good? (when good takes up a good share of income, good is more elastic)
4) time elapsed since price change (increases as consumers have more time to adjust, long term < short term)
Cross-Price Elasticity of Demand
Measures effect of change in one good’s price on the quantity demanded of the other price, (percent change in Qd of good A over percent change in price of good B
- when goods are subs, this value is (+)
- when goods are complements this value is (-)
Income Elasticity of Demand
The percent change in quantity demanded of a good when consumer’s income changes divided by percent change income.
- (+) when good is normal good, Qd increase as income increases
- (-) when good is an inferior good, Qd decreases as the income increases
Price Elasticity of Supply
The measure of the responsiveness of quantity supplied to the price of the good, (percent change in Qs divided by the percent change in price)
Perfectly Inelastic Supply
changes in price have no effect on quantity supplied
Perfectly Elastic
tiny increases/decreases in price will lead to large changes in quantity supplied
Perfect Scenarios in Supply
Are easier to find in life compared to demand.
What Factors Determine Price Elasticity of Supply?
1) Availability of Inputs (larger when inputs are available, smaller when inputs are harder to obtain)
2) Time (tends to grow as producers have more time to respond to price change, long run>short run
