Econ 101 - chp 4 Flashcards
Define the price elasticity of demand
is a unis free measure of the responsiveness of the quantity demanded of a good to a change in its price, ceteris paribus
a ratio of 2 percentage changes , measured in magnitude
What’s the formula to calculating the price elasticity of demand and how to calculate?
price elasticity of demand = (% change in quantity demanded)/ (% change in price)
we express the change in price as a percentage of the average price (point between original and new point) and the change in the quantity demanded as a percentage of the average quantity.
we express this number in terms of magnitude and it is a proportionate change
percentage change in price = (change in price/average price) x 100%
Why do we use the average price and quantity?
gives the most precise measurement of elasticity at the midpoint beween the original price + new price.
Define perfectly inelastic demand
when the quantity demanded remains constant when the price changes - the price elasticity of demand is zero
Define unit elastic demand
when the percentage change in the quantity demanded equals the percentage change int eh price - price elasticity of demand is 1.
Define inelastic demand
where price elasticity of demand is between zero and 1 - the % change in quantity demanded is less than the % change in the price
e.g. food + housing
define perfectly elastic demand
when the quantity demanded changes but an infinitely large percentage in response to a tiny price change - price elasticity of demand is infinity
the demand for a good that has a perfect substitute is perfectly elastic
e.g. soft drink
Define elastic demand
The price elasticity of demand is greater than 1
the percentage change in the quantity demanded exceed the percentage change in price
factors of elasticity of demand for a good
- closeness of substitutes
- proportion of income spend on the good
- time elapsed since the price change
How does the closeness of substitutes affect the elasticity of demand
the closer the substitutes for a good, the more elastic is the demand or it.
the degree of substitutability depends on how narrowly we define a good
luxury usually has many substitutes (elastic demand)
necessity (inelastic demand)
How does the proportion of income spend on the good affect elasticity of demand for a good?
ceteris paribus, the greater the proportion of income spent on a good the more elastic is the demand for it.
smaller proportion of your budget, that you barely notice the change so the demand is more inelastic
How doe sthe time elapsed since price change affect the elasticity for demand?
the longer the time that has elapsed since a price change, the more elastic is the demand.
time gives more substitutes developed, allowing the consumers to change their preferences and their demand
Is the elasticity of demand the same as the slope? why?
no - at the midpoint, the elasticity of demand is unit elastic while points above the midpoint are elastic and points below the midpoint are inelastic
Define the total revenue test
a method of estimating the price elasticity of demand by observing the change in total revenue that results from a change in the price, ceteris paribus
if a price cut increases the total revenue that means the elasticity fo demand is
elastic
if a price cut decreases total revenue that means the elasticity of the demand is
inelastic
if a price cut leaves total revenue unchanged, that means the elasticity of demand is
unit elastic
What’s the relationship between unit elastic and total revenue?
the point at which there is unit elasticity (demand) it where total revenue for a good is maximized.
define the income elasticity of demand and give the formula
a measure of the responsiveness of the demand for a good or service to a change in income
income elasticity of demand = (%change in Qd)/(%change in income)
What are the ranges of income elasticities of demand
- positive and greater than 1 - normal good, income elastic)
- Positive and less than 1 (normal good, income inelastic)
- negative (inferior good)
What are the implications of a good that has income inelastic demand vs elastic demand
inelastic - implication for the percentage of income spent on the goo d- percentage of income spent on that good decreases as income increases
elastic - percentage of income spent on the good increases as income increases
Define cross elasticity of demand and the formula for it
a measure of the responsiveness of the demand for a good to a change in the price of a substitute or a complement, ceteris paribus.
cross elasticity of demand - (%change in Qd)/(%change in price of a substitute or complement)
What’s the relationship between inferior goods + income elasticity of demand
negative relationship - quantity demanded and amount spent on it of an inferior decreases when income increases
What does it mean for the results of cross elasticity of demand?
if it’s negative, demand and the price of the other good change in opposite directions, so the two goods are complements
if it’s positive, the demand and the price of the other good change in the same direction so the two goods are substitutes
If 2 items are close substitutes that means the cross elasticity is
large
if 2 items are close complements, the cross elasticity is
large
if the 2 items are somewhat unrelated to each other, the elasticity is
small (perhaps 0)
Define the elasticity of supply and give the formula
measure the responsiveness of the quantity supplied to a change in the price of a good, ceteris paribus.
elasticity of supply = (%change in Qs)/(%change in price)
what are the different types of the elasticity of supply?
when elasticity of supply = 0 it’s referred as perfectly inelastic supply
when elasticity of supply = 1, it’s referred to as a unit elastic supply
when elasticity of supply = infinity, it’s referred to as perfectly elastic supply
When elasticity of supply > 1, the supply is elastic
when elasticity of supply < 1, the supply is inelastic
What are the factors that influence the elasticity of supply
- resource substitution possibilities
- time frame for the supply decision
How does resource substitution possibilities affect the elasticity of supply?
goods or services that can be produced using only unique or rare productive resources have low, elasticity of supply.
goods or services that can be produced using commonly available resources that could be allocated to a wide variety of alternative tasks have high elasticity of supply.
Where do most goods + services lie in the elasticity of supply
between 0 to infinity.
means that quantity can be increased but only by incurring a higher cost - if a higher price is offered the quantity supplied increases
What are the 3 time frames of supply - to study the influence of the amount of time elapsed since a price change
- momentary supply
- short-run supply
- long-run supply
what does momentary supply
determine?
when the price of a good changes, the immediate response of the quantity supplied is determined by the momentary supply of that good
What does short-run supply determine?
the response of the quantity supplied to a price change when only some of the possible adjustments to production can be made is determined by short-run supply
What does the long-run supply determine?
The response of the quantity supplied to a price price change after all he technologically possible ways of adjusting supply have been exploited is determined by long-run supply.
What is the elasticity of most good + services for their long-term supply
most goods + services have an elastic long-run supply
What is the elasticity of most good + services for their short-term supply
most goods + services have an inelastic short-run supply
What is the elasticity of some good + services for their momentary supply
some are inelastic (inventory of fruits at a grocery store
some are elastic (long-distance phone calls)
