Econ Exam 3 Flashcards
steep slope
elasticity is less than one or low
flat slope
elasticity is greater than one or high
what happens to elasticity when the percentage of a budget spent increases
elasticity also increases
price differences in elasticity
Cars are much more elastic than goods such as food, as small percentages of more costly items are still more expensive than those of inexpensive goods.
Luxury VS Necessity
elasticity of luxury items is much higher than basic necessities, as luxuries are more sensitive to a change in price
Elasticity as it relates to time
an increase in time taken to develop or produce a good makes it more elastic. this is caused by an increased time for consumers to respond and make purchases. an example would be the automotive industry transitioning into an era of producing smaller, more compact vehicles.
Special cases of demand elasticity
generally, flatter slopes mean that a good is more elastic than that of a good with a steep slope. perfectly elastic goods have a flat slope in which one price satisfies every quantity demanded. perfectly inelastic goods have a single demand, that satisfies all prices.
cross-price elasticity
the responsiveness of the quantity demanded of good 2, as it relates to the price change of good one. If coke prices go up, the demand for Pepsi will also increase because the goods are substitute. Substitute goods always have positive cross price elasticity, while complement goods have negative elasticity. For example, if the price of gas goes up, the demand for tires will go down because less people on the road due to the increase in gas prices.
income elasticity
how much consumption changes, relative to a change in income. increase in income leads to an increase in the consumption of normal goods such as steak. increase in income leads to a decrease in the consumption of inferior goods such as ramen.
price elasticity of supply
How much does quantity supplied change relative to a change in price? if E>1, supply is elastic and vice versa. If E=1, price is unit elastic. for example, concert ticket prices will go up, based on how much demand there is for the tickets. Sold out shows have expensive tickets while empty arenas will have cheap tickets.
Factors affecting supply
it takes time to change production and R&D takes time. elasticity will increase over time as the curve flattens out.
Excise tax and affects
fixed tax per unit sold. examples would be gas beer and cigarettes. causes the S&D curve to shift by the amount of the tax. shift gives the new equilibrium price and quantity. New Pe is what consumers pay (Pc). Ps is what the supplier gets to keep and can be found on the original supply line, combined with the line from the new line. the tax formula is tax=Pc-Ps
elasticity
a measurement in the sensitivity of X in relation to Y
Why is elasticity important to business?
Deciding whether to increase or decrease the price of a good in an attempt to bring more revenue to a company.
arc elasticity
average between two points on the graph
Firms
they get scarce resources together then produce and sell goods and services
why do firms produce?
max utility subject to constraint for firms is to make a profit, while avoiding two constraints; costs and competition
production cost
how much $ to produce a quantity of a good. quantity line is crucial because costs pertain to a set number of goods.
total cost (TC) =
wL+rK (labor and capital)
w
wage
r
interest rate of capital, which also represents and opportunity cost of doing something else with the money.
Production cost time frames
short run and long run
short run
time period short enough that one input remains constant
long run
a time period long enough that both inputs can change
