Elasticity Flashcards
Elasticity
Measures how sensitive Q demanded is to a change in price
Inelastic Demand (not-sensitive)
When price rises, the quantity demanded barely changes
Why is inelastic demand insensitive?
Products with inelastic demand have few substitutes and are necessities
Elasticity Demand Coefficient
% change Q / % change P
Inelastic Demand Coefficient
n < - 1
Elastic Demand (sensitive)
When price rises, quantity demanded changes by a lot
Why is elastic demand sensitive?
Products with elastic demand have many substitutes and are luxuries
Elastic Demand Coefficient
n > -1
Perfectly Inelastic
Change in price has no effect on quantity; n =0; Chemo, medication, insulin
Perfectly Elastic
Producers can’t change price because on one will buy the product
What is the problem with just looking at the slope to determine elasticity?
The unit problem; All depends on starting point and units of measure
Inelastic Demand: When price rises (falls)
Revenue rises (falls); P and TR move in same direction
Elastic Demand: When price rises (falls)
Revenue falls (rises); P and TR move in different directions
Determinants of Elasticity
Substitues; Passage of Time; Definition of Market; Significance in budget
Availability of Substitutes
When something is available, it is elastic because it is easy to replace