Elasticity Flashcards
What are the equations for elasticity?
% change in quality
Divided by
% change in price
Actual change
Divided by. X100
Original price
What is the definition of price elasticity?
The responsiveness of quantity demanded to price change.
What factors determine the elasticity of a good or service? (4)
- luxury or necessity?
- cheap or expensive? (Cheaper less effect on income so more inelastic)
- needs immediately or long term?
- substitutes? (More= elastic)
What is the difference between elastic and inelastic?
Elastic= small price change, big demand change
Inelastic= big price change, small demand change
What is the incidence of tax?
The proportion of a tax that is passed on to a consumer.
What is the definition of income elasticity?
The proportion to which demand changes when there is a change in income.
What numbers determine whether a product is elastic or inelastic?
Between -1 and 0 is INELASTIC
Lower than -1 is ELASTIC
What is the equation for income elasticity of demand?
% change in quantity
Divided by
% change in income
How is a normal or inferior good determined?
+ is normal
- is inferior
What is the definition of price elasticity of supply?
The measure of the responsiveness in quantity supplied to a change in price for a specific good.
What factors can affect the price elasticity of supply? (5)
- expectation of future price change
- supply of raw materials is always inelastic
- availability of spare capacity
- ability to alter production methods
- competition in the market
What is the definition of cross price elasticity of demand?
Measures the effect of elasticity of A on B (substitute or complement)
What is the equation for cross price elasticity of demand?
% change in quantity of A
Divided by
% change in price of B
What numbers signify whether a good is a complement or substitute?
0 to 1 is a weak substitute
1 to 6 is a strong substitute
0 to -1 is a weak complement
-1 to -6 is a strong complement
