Chp 4 Elasticity Flashcards
Define Elasticity
A measure of the sensitivity or responsiveness of Qd to changes in price of the good itself, incomes or price of other goods.
State the 3 types of Demand Elasticities
- Price Elasticity of Demand
- Income Elasticity of Demand
- Cross Price Elasticity of Demand
Define Price Elasticity of Demand, ___
P Ed, is a measure of responsiveness of Qd when there is a change in its own price.
State the mid point formula of P Ed
Check evernote.
Which formula in this chapter requires to use ABSOLUTE value of its ANSWER?
P Ed
Coefficients of price elasticity of demand can range from ______. Elasticity is always measured with respect ______.
0 to Infinity. to the value 1
Draw ALL scenarios of this table format:
Absolute Value of P Ed when demand is | Meaning
Check Evernote.
State ALL Determinants of Price Elasticity of Demand. [If u cant, progressive overload]
- Availability of Substitutes
- Share of budget spent on product
- Time
- Luxury or necessity
State ALL and EXPLAIN ALL Determinants of Price Elasticity of Demand. [If u cant, progressive overload]
- Availability of Substitutes :- The more and closer the substitutes, the more (price) elastic is demand. The availability of substitutes depends on how the good is defined. The narrower(eg specific brand of laptop) the definition, the more substitutes there are, causing demand for the good to be price elastic. The broader(eg laptops as a whole) the definition, the less substitutes there are, causing demand for the good to be (price) inelastic.
TR is ______ .
Total Revenue
TR follows ______ .
TR = P x Q. It follows the variable P or Q that changes the most!
Change in price of a good ultimately causes a change in ______ .
Total Revenue, TR of a firm as TR = P x Q
Define Income Elasticity of Demand
Measures responsiveness of Qd to a change in income.
State symbol of Income Elasticity of Demand and its Formula.
Symbol: Y Ed, Formula: Old Ver, check evernote.
Usefulness of Y Ed
Firm can use it to predict its sales by understanding if their good is a normal good or inferior good.
Usefulness of P Ed
P Ed assist the producer/firm in deciding whether to increase/decrease its good price (which affects Q and hence TR) in order to maximize its profit. (Profit = TR - TC)
Define Cross Price Elasticity of Demand and state its symbol
Measures the responsiveness of demand for one good (shift of the demand curve) to change in the price of another related good
State formula for Cross Price Elasticity of Demand and its symbol
Usefulness of XP Ed ?
Shows relationship between 2 goods
State what it means when XP Ed has a positive, negative and 0 coefficient respectively
Subs in Consump, Comple in Consump, Unrelated good
