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Economics Micro > Elasticity > Flashcards

Elasticity Flashcards

1
Q

What is elasticity

A

It’s a measure of how much the quantity demand will be affected by a change in price, income or the price of another good

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2
Q

What is price elasticity of demand

A

The proportionate responsiveness of quantity demanded to a change in price

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3
Q

how do you calculate price elasticity of demand

A

% change in quantity demanded / % change in price

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4
Q

What are the determinants of price elasticity of demand (SNAP)

A

Substitutes = the more substitutes the more elastic as if you up price they go to a substitutes
Necessity or luxury = necessities tend to be more price inelastic. Luxuries tend to be mor price elastic
Addictive nature= if something is addictive then its more inelastic as its harder to stop consuming it. The same can be said for switching between products such as phone contracts
Proportion of income = the greater the proportion of income the more elastic the demand (if the price of chocolate goes up we are still likely to buy it )
Short run and long run = in long run things become more price elastic as substitutes emerge or people learn to do without things

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5
Q

What happens to total revenue when price increases

A

If ped is elastic then total revenue decreases
If ped is inelastic then total revenue increases

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6
Q

How do you calculate total revenue

A

Price x quantity sold

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7
Q

What is direct tax

A

A tax on you income

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8
Q

What is indirect tax

A

A tax on expenditure/ spending

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9
Q

What is income elasticity of demand (YED)

A

The proportionate responsiveness of quantity demanded to changes in consumers’ incomes

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10
Q

What is the formally to calculate YED

A

% change in quantity demanded / % change in consumers’ income

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11
Q

What is a normal good

A

A good for which as income increases QD will also increase and vice versa

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12
Q

What is the YED of a normal good

A

A positive number

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13
Q

What is an inferior good

A

A good for which as income increases QD will fall and vice versa

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14
Q

What is the YED for an inferior good

A

A negative number

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15
Q

What is cross elasticity of demand

A

The proportionate responsiveness of quantity demanded of one good (good A) to a change in the price of another good (good B)

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16
Q

What is the formula to calculate cross elasticity of demand

A

% change in quantity demanded of good a / % change in price of good b

17
Q

If cross elasticity of demand is positive what does the mean

A

The goods are substitutes for each other
This is because as the price of one good increase then the quantity demanded for the other good also increases as they swap to the substitute item. (The opposite happens if the price falls)

18
Q

If cross elasticity of demand is negative what does the mean

A

The goods will be complements
as an increase is price of one good leads to a fall in quantity demanded of another good as they stop buying both of them
( if P falls then QD increases )

19
Q

What is price elasticity of supply (PES)

A

The responsiveness of supply to a change in price

20
Q

What is the formula to calculate PES

A

% change in quantity supplied / % change in price

21
Q

Why PES always positive

A

Because an increase in price is an incentive for suppliers to supply so they can make more profit

22
Q

What are the 4 things that determine PES

A
  • how flexible the production process is
  • how much spare capacity there is
  • how much stock there is
  • the time period
23
Q

How does flexible determine PES

A

If product can be easily switched to produce something else then is more price elastic if it can’t be easily switched then it is more price inelastic

24
Q

How does spare capacity determine PES

A

If there’s lots of spare capacity then its more price elastic
If there’s no spare capacity then the firm is operating at full capacity so increasing output is more difficult to PES is more inelastic

25
Q

How does stock determine PES

A

If there’s lots of stock then supply can be quickly increased making it more elastic
If there isn’t lots of stock then supply is difficult to increase making it more inelastic

26
Q

How does time period determine PES

A

Momentary period= supply is fixed
Short term = price inelastic
Long term = price elastic

Economics Micro (6 decks)

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