Elasticity Flashcards
What does a steep demand curve represent in terms of a consumers sensitivity to prices?
Consumers are not very price sensitive and won’t change their quantity demanded much in response to a price change
What does a shallow supply curve represent in terms of a producers sensitivity to prices?
Producers are more price sensitive, there will be big movements in the quantity supplied as the price changes
Define elasticity.
Elasticity is the ratio of the percentage change in one value to the percentage change in another
Define price elasticity of demand.
Price elasticity of demand is the ratio of the percentage change in quantity demanded resulting from a given percentage change in price
What symbols represents price elasticity of demand and supply?
ED, ES
Are slope and elasticities the same?
No
Whats the equation for the elasticity between Y and X?
EXY = X/Y ∆Y/∆X
What are two disadvantages of using slopes instead of elasticities?
- ) Slopes depend on the units of measurements
2. ) Can’t compare slopes across different products,
What is the formula for price elasticity of demand?
Price elasticity of demand = (% change in quantity demanded)/(% change in price)
What is the formula for price elasticity of supply?
Price elasticity of supply = (% change in quantity supplied)/(% change in price)
How does a high demand price sensitivity relate to price elasticities?
A high price sensitivity means a small change in price will lead to large changes in quantity demanded, this means the numerator of the elasticity expression will be large compared to the denominator and so will be large in magnitude
Why is elasticity of demand usually a negative number?
As price increases, quantity demanded decreases, as price decreases, quantity demanded increases
Why do we usually use the magnitude of the elasticity of demand?
Being it is usually negative
Define price elastic.
A price elasticity with an absolute value greater than 1
Define price inelastic.
A price elasticity with an absolute value less than 1
Define unit elastic.
A price elasticity with an absolute value equal to 1
When is a good called perfectly inelastic?
When they have a price elasticity that is equal to zero, there is no change in change demanded or supplied for any change in price
When is a good called perfectly elastic?
When they have a price elasticity that is infinite, any change in price leads to an infinite change in quantity demanded demanded or supplied
What is meant by ED > 1?
The percentage change in quantity demanded is greater than the percentage change in price
What is meant by ED < 1?
The percentage change in quantity demanded is less than the percentage change in price
What is meant by ED = 1?
The percentage change in quantity demanded is equal to the percentage change in price
What is the equation for the price elasticity of demand for a linear demand curve?
ED = ∆Q/∆P * P/Q
What does ∆Q/∆P and P/Q stand for the in the equation for the price elasticity of demand?
1/slope and then the value of a given point on the demand curve
What is meant by ED = 0?
There is no response in quantity to price changes
Is the price elasticity the same for the whole demand curve? And why?
No it changes, because it is dependent on a given point
On a demand curve what part is elastic, unit elastic and inelastic?
Elastic to the left and then unit elastic at a point in the middle and inelastic to the right
Draw a demand curve with the elasticities drawn on.
Picture
Why does moving down the demand curve decrease the price elasticity?
As we move down the curve the P/Q ratio falls reducing the magnitude of the price elasticity of demand
What do perfectly inelastic supply or demand curves look like?
Vertical lines
What do perfectly elastic supply or demand curves look like?
Horizontal lines
Name six things that influence price elasticity of demand?
- ) Availability of substitutes
- ) Time
- ) Advertising
- ) Type of product
- ) Price of product in relation to income
- ) Durability of good
How does the availability of substitutes effect price elasticity?
Many substitutes means the price is elastic, few substitutes means the price is inelastic
How does the price of the product in relation to income e effect price elasticity?
The greater the percentage of income the good costs the more price elastic the good will be
Is it just the influence of price on demand and supply that can be measured using elasticities?
No all the other factors that influence demand and supply can also be measured using them
Define the income elasticity of demand?
The income elasticity of demand is the percentage change in quantity demanded associated with a 1% change in consumer income
What is the formula for the income elasticity of demand?
Income elasticity of demand = (% change in quantity demanded)/(% change in income)
What is the equation for the income elasticity of demand?
EiD = ∆QD/∆I * I/QD
Define an inferior good.
An inferior good is a good for which quantity demanded decreases when income rises
What value of EiD to inferior goods have?
Less than 0
Define a normal good.
A good for which quantity demanded rises when income rises
What value of EiD to normal goods have?
Greater than 0
Define a luxury good.
A good with an income elasticity greater than 1
What value of EiD do necessity goods have?
Between 0 and 1
What value of EiD do luxury goods have?
Greater than 1
What is meant by a positive income elasticity?
As the consumers income rises so does the quantity demanded
What four factors influence income elasticity of demand?
- ) Level of income
- ) Product perception
- ) Lifestyle changes
- ) The economic climate
How does income effect income elasticity of demand?
People on lower incomes will experience higher percentage change in incomes than those on higher incomes
How does product perception effect income elasticity of demand?
Some goods have a snob appeal as income grows - cars
How does lifestyle changes effect income elasticity of demand?
Increase in income may be associated with less time to prepare meals at home and thus an increases in ready meals or eating out
How does the economic climate effect income elasticity of demand?
Even though incomes may be rising, a slow down in economic growth can effect and individuals consumption patterns
Define the cross-price elasticity of demand?
The cross-price elasticity of demand is the percentage change in the quantity demanded of one good associated with a 1% change in the price of another good
What is the formula for cross-price elasticity of demand?
Cross-price elasticity of demand = (% change in quantity demanded of X)/(% change in price of Y)
When is the cross-price elasticities likely to be positive?
When the goods are substitutes
When is the cross-price elasticities likely to be negative?
When the two goods are complements
What are complement goods?
Goods that tend to be consumed together
