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Microeconomics 2420 > Elasticity > Flashcards

Elasticity Flashcards

1
Q

What kind of number is price elasticity of demand

A

A negative number

More negative the number, the larger the number is

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2
Q

What does a large value for price elasticity of demand mean

A

The quantity demanded changes a lot in response to a price change

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3
Q

When is demand price elastic

A

When price elasticity of demand is larger than 1

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4
Q

When is demand price inelastic

A

When price elasticity of demand is smaller than 1

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5
Q

When is demand unit price elastic

A

When price elasticity of demand is exactly equal to 1 or -1

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6
Q

How is price elasticity of demand calculated

A

At a specific price or quantity level

Ex: $3.00 or $3.50

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7
Q

What is the price elasticity midpoint formula

A

Price elasticity of demand =

( Q2 - Q1 )   /  ( P2 - P1) 
   --------           --------
  Q1 + Q2.         P1 + P2

% change in % change in
Quantity Price

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8
Q

What is elasticity related to

A

Slope

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9
Q

In elasticity, the curve with the higher slope =

A

A more negative elasticity

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10
Q

What does a vertical demand curve mean

A

Quantity demanded does not change as price changes.

Elasticity = 0
&
Is perfectly inelastic

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11
Q

What does a horizontal demand curve mean

A

Quantity demanded is infinitely responsive to price changes.

Elasticity is infinite
&
Is perfectly inelastic

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12
Q

What is the availability of close substitutes in elastic demand

A

If a product has more substitutes available it will have more elastic demand

Ex: gas = low
Nikes = high

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13
Q

What is the passage of time in elastic demand

A

Over time people can adjust their buying habits more easily,
Elasticity is higher in the long run.

Ex: gas prices rising

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14
Q

What is “ whether the good is a luxury or necessity” in price elasticity demand

A

People are more flexible with luxuries than necessities, so price elasticity of demand is higher for luxuries.

Ex: bread and milk are necessities

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15
Q

What is the definition of market in elastic demand

A

The more narrowly defined the market the more substitutes are available and hence the more elastic is demand.

Ex: no substitutes for miss me jeans so my demand is very inelastic

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16
Q

What is the share of a good in a consumers budget in elastic demand

A

If a good is a small portion of your budget you will likely not be very sensitive to its price.

Ex: salt

17
Q

What is total revenue

A

The total amount of funds received by a seller of a good or service, calculated by price per unit X the number of units sold

18
Q

What happens when your product is price inelastic

A

Customers aren’t sensitive to the price,

Expect to gain customers when you lower prices,

Customers don’t compete for lost revenue so revenue decreases

19
Q

What happens when your product is price elastic

A

Customers are sensitive to price change,

Expect to gain customers when you decrease price

20
Q

What is the formula for price elasticity of demand

A

P.E. of demand =
% change in quantity demanded
—————————————
% change in price

21
Q

In a linear demand curve what happens to total revenue as price increases

A

Total revenue rises and when revenue falls, demand is elastic

22
Q

What are substitutes

A

Goods and services that can be used for the same purpose

23
Q

What are compliments

A

Goods and services that are used together

24
Q

What is cross price elasticity of demand

A

Measures the strength of substitutes or compliment relationship between goods

25
Q

If products are substitutes, then cross price elasticity of demand will be

A

Positive

26
Q

If two products are compliments, then cross price elasticity of demand will be

A

Negative

27
Q

What are normal goods

A

Goods and services for which the quantity demanded increases as income increases

28
Q

What are inferior goods

A

Goods and services for which the quantity demanded falls as income increases

29
Q

What does the price elasticity of supply depend on

A

The ability and willingness of firms to alter the quantity they produce as price increases

30
Q

What is price elasticity of demand

A

Measure and responsiveness of quantity demanded to changes in price

Microeconomics 2420 (2 decks)

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