Elasticity Flashcards
What is elasticity?
A measure of a variables sensitivity to change in another variable, usually a measure of the change in quantity demanded of a good or service in relation to price changes
When is a product considered to be elastic?
If the quantity demand of that product changes more than proportionally when its price increases or decreases
What is the formula for “price elasticity of demand?” (Ed)
Ed = percentage change in quantity demanded / percentage change in price
Often, we are not given percentage changes and have to convert them ourselves, what equation do we use?
(new price - old price) / (old price)
X 100
If a product has an elasticity value of “2” what does this tell us?
That for every 1% increase in price, quantity demanded declines by 2%
When is a product considered “elastic demand”
if the percentage change in quantity demanded is bigger than the percentage change in price (Ed > 1)
When is a product considered “inelastic”
When products see little change in sales even when price changes dramatically (Ed < 1), if there are no changes at all its called perfectly inelastic
Demand curves are relatively steep
When is a product considered “unit elastic”
When the percentage change in quantity demanded is equal to the percentage change in price. (Ed = 1). Changes in price result from a similar percentage change in the quantity demanded
eg. shoes, cars, salon services
What are the 4 determinants of elasticity?
1) Substitutes ( how many close substitutes does this product have?)
2) Proportion of income spent on the produc
3) Luxuries over necessities
4) Time period (when people have little time to adjust to price changes, demand tends to become more inelastic
How do you measure total revenue (TR)
You multiply the number of units sold by the price of each Unit
When the price of a product is low, the percentage change in price will be ________ than the percentage change in quantity, resulting in ________ demand.
When the price is high, the percentage change in price will be _________ than the percentage change in quantity, resulting in ________ demand
Greater; Inelastic
Less; Elastic
What does “cross elasticity of demand” measure?
How responsive the quantity demanded of one good (product A) is to changes in the price of another
If cross elasticity of demand between two products is positive, then they are __________. If the cross elasticity of demand between the products is negative, then they are _________.
Substitutes; Compliments
What does “income elasticity of demand” measure?
How responsive the demand for a good is to changes in consumer income
What is the formula for calculating elasticity of supply?
Percentage change in quantity supplied / percentage change in price
How do you figure out if a supply curve is elastic, inelastic, and unit elastic
Elastic supply curves always crosses the vertical axis, and ineleastic supply curves always cross the horizontal axis. Unit elastic supply curves always go in the middle where zero is
What’s the difference between the short-run period and a long run period
In the short run, at least one factor of production can’t be changed. The number of firms in the industry can’t change. In the long-run firms can alter an factors of production
What are the 2 types of taxes?
Taxes on income sources and taxes on spending
What is a progressive tax
Those that rise in percentage as income increases
What are regressive taxes
Fall in percentage as income increases
What are flat taxes
Take a constant percentage of ones income
What are excise taxes?
Taxes placed on specific types of goods, like gas and alcohol.
What is the “incidence of taxation”
Who bears the economic burden of a tax
