Elasticity Flashcards
What does it mean if the demand curve is steeper than normal or flatter than normal
If its steeper then the product is less elastic
If its flatter then the product is more elastic
What happens to elasticity if there is availability of close substitutes
Goods with substitutes will be more elastic as a small price increase means buyers will switch easily
How does the good being a necessity vs a luxury effect elasticity
Essential/necessary goods will be more less elastic as if its price rises people will pay as they need the product
How does market definition effect elasticity
Narrowly defined market (fewer competitors) will be more elastic as its easier to find substitutes
How does time horizon effect elasticity
Demand becomes more elastic over time as it becomes easier to move away from the product
What is the formula for price elasticity of demand PED
%change in quantity demanded/%change in price
What does it mean if a product is perfectly inelastic
Any increase in price has no effect on the quantity demanded
PED is 0
What does it mean if a product is perfectly elastic
Any increase in price reduces the quantity to 0
PED is infinity
What are giffen goods and what is their elasticity
Giffen goods are ones that do not follow the law of demand - demand increases as price increases
They have a negative PED
How is total expenditure affected with regards to elasticity
A price increase with inelastic demand will raise total expenditure
A price increase with elastic demand will lower total expenditure
What is cross price elasticity and how is it worked out
It is the measure of how a change in price of one product changes the demand of another
CPE = %change in Qd of good A/% change in price of good B
What is Income elasticity of demand and how is it worked out
IED is how responsive quantity demanded is to changes in income
IED = %change in quantity demanded/%change in income
What is the CPE of a product with substitutes
CPE is above 0 - buyer will buy more of good A when the price of good B rises
What is the CPE of a product with complements
CPE is below 0 - people will buy less of good A when the price of good B rises
What is price elasticity of supply and how is it worked out
PES is the responsiveness of quantity supplied to price
PES = %change in quantity supplied/%change in price
flatter supply curve is more elastic
