Elasticity Flashcards
What is elasticity?
Measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants.
What does price elasticity measure?
How much quantity demanded of a good responds to a change in the price of that good.
What is the formula for percentage change?
% Change = (b-a) × 100/a
What is the Midpoint Formula for percentage change?
Midpoint Formula % Change = (b-a) / (a + b/2)
- Availability of Close Substitutes
- Necessities vs. Luxuries
- Definition of the market
- Time horizon
How does the availability of close substitutes affect demand elasticity?
Goods with close substitutes have more elastic demand.
How do necessities and luxuries differ in terms of demand elasticity?
Necessities have inelastic demand, while luxuries have elastic demand.
How does the definition of the market affect demand elasticity?
Narrowly defined markets have more elastic demand.
How does the time horizon affect demand elasticity?
Demand is more elastic over longer time horizons.
How is Price Elasticity of Demand computed?
Price Elasticity of Demand = % change in quantity demanded / % change in price
Use absolute value (drop the minus sign).
What is the Midpoint Method for calculating Price Elasticity of Demand?
Price Elasticity of Demand = (Q2 - Q1) / [(Q2 + Q1) / 2] divided by (P2 - P1) / [(P2 + P1) / 2]
What is the condition for demand to be elastic?
Price Elasticity of Demand > 1
What is the condition for demand to be perfectly inelastic?
Price Elasticity of Demand = 0
Demand curve is vertical.
What is the condition for demand to be inelastic?
Price Elasticity of Demand < 1
What is the condition for demand to be perfectly elastic?
Price Elasticity of Demand = Infinity
What is the condition for demand to be unit elastic?
Price Elasticity of Demand = 1
Demand curve is horizontal.
What does a flatter demand curve indicate?
The greater the price elasticity of demand.
What is Total Revenue (TR)?
Amount paid by buyers and received by sellers of a good
Price of the good X the quantity sold (PxQ).
What happens to Total Revenue when demand is inelastic and price increases?
TR increases.
What happens to Total Revenue when demand is elastic and price increases?
TR decreases.
When demand is inelastic (elasticity < 1), how do price and TR move?
P and TR move in the same direction.
When demand is elastic (elasticity > 1), how do price and TR move?
P and TR move in the opposite direction.
What happens to Total Revenue when demand is unit elastic?
TR remains constant when the price changes.
What are normal goods?
Normal goods have positive income elasticity and a constant slope.
What characterizes necessities in terms of income elasticity?
Necessities have smaller income elasticities.
What characterizes luxuries in terms of income elasticity?
Luxuries have large income elasticities.
What indicates inelastic demand?
Points with low price and high quantity indicate inelastic demand.
What indicates elastic demand?
Points with high price and low quantity indicate elastic demand.
What are inferior goods?
Inferior goods have negative income elasticities.
What is income elasticity of demand?
Income elasticity of demand measures how much the quantity demanded of a good responds to a change in consumers’ income.
How is income elasticity of demand calculated?
It is calculated as the % change in quantity demanded divided by the % change in income.
What is cross-price elasticity of demand?
Cross-price elasticity of demand measures how much the quantity demanded of one good responds to a change in the price of another good.
How is cross-price elasticity of demand calculated?
It is calculated as the % change in quantity demanded of the first good divided by the % change in price of the second good.
What are substitutes?
Substitutes are goods typically used in place of one another and have positive cross-price elasticity.
What are complements?
Complements are goods typically used together and have negative cross-price elasticity.
