Elasticity Flashcards
What are the main determinants of supply elasticity and what do they mean?
Availability of inputs – how easy is it to access the things factors of production needed to make the product
Passage of time – do firms have the necessary amount of time to make the changes needed for price changes.
What do the different elasticity outcomes mean in terms of supply?
Elastic – Companies are capable of expanding or compacting production easily with changes in price
Inelastic – companies have difficulties changing their production level with the changes in price
Perfectly elastic – no matter what the price is, the company will produce as much as possible
Perfectly inelastic – no matter the change in the price, there is no way for producers to change the quantity supplied
What is the formula for the price elasticity of supply?
% change in QS/% change in P = E^s-sub-p
What is the notation for the price elasticity of supply?
E^s-sub-p
What does price elasticity of supply look at?
Price elasticity of supply looks at a firms willingness/capability to adjust production rates to changes in price
How do we use the cross-price elasticity to determine the relationship between items?
E^p-sub-c > 0 = substitutes (QD of item 1 increases and P of item 2 increases)
E^p-sub-c <0 = complements (QD of item 1 decreases and P of item 2 increases)
E^p-sub-c = 0 (or within 1/10) = unrelated items
What is the formula for the Cross-Price Elasticity?
E^p-sub-c = % change QD (item 1)/ % change Price (item 2)
What is the notation for the Cross-Price Elasticity?
E^p-sub-c
What is Cross-Price Elasticity?
Cross-Price Elasticity is where you see how the consumption of one item will change due to a price change of another item
How do we use our results from the income elasticity formula to determine what type of item we have?
0<E-sub-i<1 = a normal good that is a necessity (inelastic)
E-sub-i > 1 = a normal good that is a luxury (elastic)
E-sub-i <0 = an inferior good (only inelastic if you can’t afford anything else)
What is the formula for income elasticity?
E-sub-i = % change in QD/% change in income
What is the notation for income elasticity?
E-sub-i
What is income elasticity?
Income elasticity is the same concept as own price elasticity. However, instead of looking at how consumers react to price changes, it looks at how consumers react to income changes
What are the two effects that could happen when using revenue to determine if a company should change the price of a product?
Quantity effect – lost sales due to elastic demand = lost revenue
Price effect – inelastic demand where consumers will purchase an item despite how expensive it is = more revenue per sale = more revenue
How can we use revenue to determine the elasticity of a product?
Before changing the price of a product, a company can look at what that price change would do to their revenue to determine if it is worth it or not
How do we determine revenue (formula)?
Total Revenue = Price * Quantity
What is revenue?
Revenue is the money a business brings in before taxes, employee payment and any supply restock
In reference the definition of the good determinant, what terms are we using, how are they used to influence elasticity, and what is an example for them?
Narrow – the item you are looking for is specific enough to provide substitutes, which means an item is elastic. An example would be going to the store for frosted flakes and realizing it is really expensive. So, you buy one of the many off-brand options at your disposal.
Broad – the item you are looking for isn’t that specific, so it is difficult to find an adequate substitute for it, making the item inelastic. An example would be going to the store for cereal and finding out that it is all very expensive. Since there are no good alternatives for cereal, you buy it anyways
What are the primary determinants of own price elasticity, what do they mean, and which of these is the most influential?
Availability of Substitutes – most influential, does an item have substitutes and can you easily use them to substitute said item
Passage of Time – do you have enough time to find a substitute for an item
Definition of the good – the more specific an item is, the easier it is to substitute
Luxuries vs Necessities – Luxuries are far easier to substitute because you can live without them
Share of good in our budget – the more we have to spend for a certain item, the more we are affected by the price change (increases in mortgage rates vs egg prices)
What are the two special cases of own price elasticity and how do we use the own price elastic formula to recognize these?
Perfectly inelastic = |E^o-sub-p|=0
Perfectly elastic= |E^o-sub-p|=infinity
Based on the own price elasticity, how do we know what type of elasticity we have?
Elastic demand = |E^o-sub-p|>1
Inelastic demand = |E^o-sub-p|<1
Unit elastic demand = |E^o-sub-p|=1
For demand, what are the three types of elasticity outcomes we can receive and what do they mean?
Elastic demand – demand fluctuates a lot because it can easily be substituted (usually)
Inelastic demand – demand doesn’t change easily because it cannot be easily substituted
Unit elastic demand – nothing changes much from the equilibrium other than (maybe) the equilibrium location of the model
Will the own price elasticity value change along the demand curve?
In some scenarios it can if the demand line is curve, so the distance between points can be drastically different. If the demand line is straight, however, the own price elasticity value will be the same along the entirety of the line.
What formula do we use if we do not have the change percentage for own price elasticity?
|E^o-sub-p|= ((Q2-Q1)/((Q1+Q2)/2))/((P2-P1)/((P1+P2)/2))
