Elasticity Flashcards
What are the 4 elasticities?
-price elasticity of demand
-price elasticity of supply
-income elasticity of demand
-cross elasticity
What is price elasticity of demand?
-the responsiveness of demand to changes in price
How do you calculate price elasticity of demand ?
% change in quantity demanded / % change in price
When is it inelastic?
If the answer is between 0 and -1
When it is elastic?
If the answer is between -1 and Infinity
What type of answer is price elasticity?
Always a negative answer
What would happen if demand price is elastic?
-increasing price would reduce TR (total revenue)
-reducing price would increase TR
What would happen if demand price is inelastic?
-increasing price would increase TR
-reducing price would reduce TR
How is something unitary elastic?
-if it =1
-when % change in quantity demanded is the same as % change in price)
How is something perfectly inelastic?
-if it =0
-when % change in quantity demanded stays the same no matter the change in price)
How is something perfectly elastic?
-if it = infinite
-when % change quantity demanded drops completely if there is any change in price
What are the likely determinants of elasticity of demand?
-time period
-number and closeness of substitutes
-the proportion of income taken up by the product
-luxury or necessity
-habit forming
What is price elasticity of supply?
The responsiveness of supply to a change in price
Will price elasticity of supply be positive or negative?
Always positive
Is an elastic supply a steep line on a graph or a shallow line?
Elastic supply = shallow line
Is an inelastic supply a steep line on a graph or a shallow line?
Inelastic supply = steep line
If the value is less than one what is it?
Inelastic
If the value is greater than one what is it?
Elastic
If the value equals one what is it?
Unit elastic
How do you calculate price elasticity of supply?
% change in quantity supplied / % change in price
What are some likely determinants of elasticity of supply?
-availability of the four FOP’s
-time
-spare capacity
-spare stock and components
What is income elasticity of demand?
Responsiveness of demand to a change in income
How do you calculate income elasticity of demand?
% change in quantity demanded / % change in income
If the answer of YED is positive, what sort of good is it?
A “normal” good
If the answer of YED is negative, what sort of good is it?
An “inferior” good
What is a normal good?
(Positive value)
Demand rises and income rises and vice versa
What is an inferior good?
(Negative value)
Demand falls as income rises and vice versa
What is a luxury good?
(YED)
An answer with a value of +1
What is cross elasticity?
The responsiveness of demand of one good to changes in price of a related good
What does cross elasticity show?
-some goods are complements of each other
-some goods are substitutes of each other
What is a negative value in XED?
A complementary good
What is a positive value in XED?
A substitute good
How do you calculate cross elasticity of demand?
% change in quantity demanded of good A / % change in price of good B
What does a higher value mean in XED?
The closer they are
