Econ 101: Chapter 5 Flashcards
Price elasticity of demand is…
negative.
Price elasticity of demand
measures how responsive buyers are to price changes.
Measures the percent change in quantity demanded that follows from a 1% price change.
elastic
when the absolute value of the % change in quantity is larger than the absolute value of the % change in price.
> 1.
inelastic
when the absolute value of the % change in quantity is smaller than the absolute value of the % change in price.
<1.
When buyers are very responsive to price…
their demand is elastic.
When buyers are not very responsive to price…
their demand is inelastic.
unit elastic
When the absolute value of the price elasticity is exactly equal to 1.
neither elastic nor inelastic.
Elastic demand curves are…
relatively flat.
Inelastic demand curves are…
relatively steep.
Elasticity is not the same as…
slope.
perfectly elastic
when any change in price leads to an infinitely large change in quantity.
horizontal curve.
perfectly inelastic
when quantity does not respond at all to a price change.
vertical curve.
Demand elasticity is all about…
substitutability.
Demand elasticity factor 1:
more competing products = greater elasticity.
Demand elasticity factor 2:
Specific brands/products tend to have more elastic demand than categories of goods.
Demand elasticity factor 3:
necessities have less elastic demand.
Demand elasticity factor 4:
consumer search makes demand more elastic
Demand elasticity factor 5:
demand gets more elastic over time.
higher prices lead to greater revenue if…
demand is inelastic
cross price elasticity of demand.
a measure of how responsive the demand of one good is to price changes of another.
Measures the change in quantity demanded that follows a 1% change in the price of another good.
Cross price elasticity is positive for…
subsititute goods.
cross price elasticity is negative for…
complement goods.
cross price elasticity is near zero for…
independent goods.
Income elasticity of demand
measures how responsive your demand for a good is to changes in your income.
It measures by what percent the quantity demanded will change following a 1% change in income.
income elasticity of demand is positive for…
normal goods.
income elasticity of demand is negative for…
inferior goods.
price elasticity of supply
a measure of how responsive sellers are to price changes.
It measures the % change in quantity supplied that follows from a 1% price change.
price elasticity of supply is…
positive.
when supply is inelastic..
quantity is relatively unresponsive to price.
when supply is elastic…
quantity is relatively reponsive to price.
price elasticity of supply is all about…
flexibility
supply elasticity factor 1:
inventories make supply more elastic.
supply elasticity factor 2:
easily available variable inputs make supply elastic.
supply elasticity factor 3:
extra capacity makes supply elastic
supply elasticity factor 4:
Easy entry and exit makes supply more elastic.
supply elasticity factor 5:
Over time, supply becomes more elastic.
