Economics Chapter 5-8 Flashcards
Price elasticity
the relationship between the percent change in price resulting in a corresponding percentage change in the quantity demanded or supplied
Price Elasticity of Demand
Percentage change in the quantity demanded of a good or service divided the percentage change in price
Price Elasticity of Supply
Percentage change in the quantity supplied divided by the percentage change in price (Price elasticity of demand should be an absolute value)
Elastic demand
When the elasticity of demand is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in price
Elastic supply
When the elasticity of either supply is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in price
Inelastic supply
when the elasticity of supply is less than one, indicating that a 1 percent increase in price paid to the firm will result in a less than 1 percent increase in production by the firm; this indicates a low responsiveness of the firm to price increases (and vice versa if prices drop)
inelastic demand
when the elasticity of demand is less than one, indicating that a 1 percent increase in price paid by the consumer leads to less than a 1 percent change in purchases (and vice versa); this indicates a low responsiveness by consumers to price changes
Unitary elasticities
when the calculated elasticity is equal to one indicating that a change in the price of the good or service results in a proportional change in the quantity demanded or supplied
Midpoint Method for Elasticity
The average percent change in both quantity and price
Midpoint Method for Elasticity Equation
% change in quantity= (Q2–Q1)/((Q2+Q1)/2) × 100
% change in price=P2–P1/((P2+P1)/2) × 100
The advantage of the Midpoint Method
You obtain the same elasticity between two price points whether there is a price increase or decrease. This is because the formula uses the same base (average quantity and average price) for both cases.
Infinite elasticity (perfect elasticity)
the extremely elastic situation of demand or supply where quantity changes by an infinite amount in response to any change in price; horizontal in appearance
Examples of goods with readily available inputs and whose production can easily expand will feature highly elastic supply curves (close to perfect)
pizza, bread, books, and pencils.
Examples of items that take a large share of individuals’ income, and goods with many substitutes are likely to have highly elastic demand curves.
Caribbean cruises and sports vehicles.
An infinite elasticity curve will be
perfectly horizontal
Zero elasticity (perfect inelasticity)
The highly inelastic case of demand or supply in which a percentage change in price, no matter how large, results in zero change in the quantity; vertical in appearance
Examples of goods with limited supply of inputs are likely to feature highly inelastic supply curves.
diamond rings or housing in prime locations such as apartments facing Central Park in New York City.
Examples of necessities with no close substitutes are likely to have highly inelastic demand curves.
Life-saving drugs and gasoline.
Constant unitary elasticity, in either a supply or demand curve, occurs when
A price change of one percent results in a quantity change of one percent.
Unlike the demand curve with unitary elasticity
the supply curve with unitary elasticity is represented by a straight line, and that line goes through the origin.
If demand is elastic (% change in Qd > % change in P)
A given % rise in P will be more than offset by a larger % fall in Q so that total revenue (P × Q) falls.
If demand is unitary (% change in Qd=% change in P)
A given % rise in P will be exactly offset by an equal % fall in Q so that total revenue (P × Q) is unchanged.
Inelastic (% change in Qd< % change in P)
A given % rise in P will cause a smaller % fall in Q so that total revenue (P × Q) rises.
Since demand for food is generally inelastic, farmers may often face the situation that
A surge in production leads to a severe drop in price that can actually decrease the total revenue that farmers receive.