Elasticity Flashcards
What does Price Elasticity of Demand measure?
Measures the responsiveness of quantity demanded (Qd) to changes in price (P)
How do you calculate Price Elasticity of Demand?
ED = %ΔQd / %ΔP
What is the relationship between Price Elasticity of Demand and the slope of Demand?
Price Elasticity of Demand relates to the relative changes in Qd and P, while slope captures absolute changes.
What determines whether demand is price elastic or price inelastic?
Availability of substitutes, time, necessities versus luxuries, and definition of the market
What does Price Elasticity of Demand tell us about how changes in price affect revenue?
It indicates whether an increase or decrease in price will raise or lower total revenue (TR).
What does Income Elasticity of Demand measure?
Measures the responsiveness of quantity demanded (Qd) to changes in income (Y)
What does Cross-Price Elasticity of Demand measure?
Measures how the quantity demanded of one good responds to changes in the price of another related good.
What does Price Elasticity of Supply measure?
Measures the responsiveness of quantity supplied to changes in price.
What is the formula for calculating elasticity?
E = %ΔY / %ΔX
What are the four key types of elasticity?
- Price Elasticity of Demand (PED or ED) * Income Elasticity of Demand (YED or EY) * Cross-Price Elasticity of Demand (XED or EX) * Price Elasticity of Supply (PES or ES)
What indicates perfectly inelastic demand?
|ED| = 0; demand is fixed regardless of price changes
What indicates elastic demand?
|ED| > 1; consumers are sensitive to price changes
What indicates unit elastic demand?
|ED| = 1; change in price yields exactly proportionate change in quantity demanded
What is the effect of a price increase on total revenue if demand is elastic?
Total revenue will decrease.
What is the effect of a price decrease on total revenue if demand is inelastic?
Total revenue will decrease.
What is a characteristic of inferior goods in terms of income elasticity?
EY < 0; quantity demanded decreases as income increases.
What is a characteristic of normal goods in terms of income elasticity?
0 < EY < 1; quantity demanded moderately responds to changes in income.
What is a characteristic of luxury goods in terms of income elasticity?
EY > 1; quantity demanded strongly responds to changes in income.
What is the relationship between substitutes and cross-price elasticity?
EX > 0; an increase in the price of one leads to an increase in the quantity demanded of the other.
What is the relationship between complements and cross-price elasticity?
EX < 0; an increase in the price of one leads to a decrease in the quantity demanded of the other.
Fill in the blank: The formula for calculating the midpoint elasticity is E = (________).
(ΔQ / Q) / (ΔP / P)
True or False: If Ed = 1, changes in price will not affect total revenue.
True
What does EX represent in the context of goods/services?
The cross-price elasticity of demand
EX measures the responsiveness of the quantity demanded of one good to a change in the price of another good.
What is the relationship between QdA and PB for substitute goods?
EX > 0
For substitutes, an increase in the price of good B leads to a decrease in quantity demanded of good A.
What is the relationship between QdA and PB for complementary goods?
EX < 0
For complements, an increase in the price of good B leads to a decrease in quantity demanded of good A.
What does price elasticity of supply (Es) measure?
How the quantity supplied of a good responds to a change in the price of that good.
What is the formula for price elasticity of supply (Es)?
Es = %ΔQS / %ΔP
What does an Es value of 0 indicate?
Perfectly inelastic supply
What does an Es value greater than 1 indicate?
Relatively elastic supply
What factors determine the price elasticity of supply?
- Time
- Cost of inputs
How does time affect price elasticity of supply?
Longer time frames generally make supply more price elastic.
What happens to supply when production costs increase due to input scarcity?
Supply becomes relatively more price inelastic.
What is a quota in the context of government intervention?
A direct restriction on consumption to a certain amount of alcohol per person.
What is a price ceiling?
A maximum price set below equilibrium price to restrict quantity supplied.
What is a price floor?
A minimum price set above equilibrium price to restrict quantity demanded.
What effect does a tax have on the price paid by buyers and the price received by sellers?
Taxes increase prices for buyers and lower them for sellers.
How does a tax on alcohol affect quantity demanded and supplied?
Both quantity demanded and supplied would decrease.
What are the welfare implications of a tax?
Changes in marginal benefit (MB) and marginal cost (MC) affect allocative efficiency.
True or False: A tax on alcohol would likely create surpluses.
False
What happens to the equilibrium price and quantity when a $5 tax is imposed on alcohol?
Price paid by buyers increases and quantity decreases.
What is the consequence of a tax compared to a price floor in terms of quantity supplied?
A tax can achieve the same reduction in quantity demanded without surplus issues.
What happens to demand for alco-pops if a tax is applied specifically to them?
Demand is likely to be elastic.
Fill in the blank: Price elasticity of demand informs us about the effect of price changes on firms’ total _______.
revenue
What are the commonly used elasticity measures?
- Price elasticity of demand
- Income elasticity of demand
- Cross-price elasticity of demand
- Price elasticity of supply
What distinguishes normal goods from inferior goods?
Normal goods have positive income elasticity, while inferior goods have negative income elasticity.
What is the impact of price elasticity of demand on welfare consequences of market dynamics?
It influences how consumers and producers respond to price changes and thus affects total surplus.
