Elasticities Flashcards
What does the price elasticity of supply depend on?
The flexibility of the sellers to change the amount of the good they produce.
What does the price elasticity of demand depend on?
Whether or not the buyer is willing to pay more for the same good
What are the three types of elasticities we learned?
Price elasticity of supply and demand, income, cross-price
What is income elasticity?
Measure of how much the quantity demanded of a good responds to a change in consumer’s income
What is cross-price elasticity?
Measure of how much quantity demanded of one good responds to a change in the price of another good
When is it a normal good
If income elasticity is positive
When is it an inferior good
If income elasticity is negative
When is it a substitute
When cross-price elasticity is positive
When is it a complement?
When cross-price elasticity is negative
What are determinants of the price elasticity of demand?
Availability of close substitutes:
Elastic demand: goods with close substitutes
Inelastic demand: goods with no close substitutes
Necessities and luxuries
Elastic demand: luxuries
Inelastic demand: necessities
Defining the market broadly or narrowly
Elastic: narrowly defined markets
Inelastic: BROADLY defined markets
Time horizon:
More elastic demand: longer time horizons
Less elastic demand: shorter time horizons
What are the determinants of the price elasticity of supply?
Depends on FLEXIBILITY OF SELLERS TO CHANGE THE AMOUNT they PRODUCE
(how easy is it for them to produce more/less)
If easy, then elastic
If not easy then inelastic
How does the time horizon effect price elasticity of supply?
Short run:
Inelastic (quantity supped is not very responsive to price changes)
Long run:
Elastic (quantity supplied responds substantially to price changes)
What is total revenue?
Price times quantity
What happens to revenue if price is inelastic and price increases
Increases, because inelastic means people will buy the product no matter what
