Elasticity Flashcards
What is elasticity? And what are the different types?
Elasticity is a measure of the impact that a change in price has on quantity demanded and essentially on willingness to pay.
The different measurements are point elasticity of Demand, price elasticity of Demand, elasticity of supply, cross elasticity of Demand, and Income Elasticity of Demand
What is the price elasticity of Demand?
What is the formula?
The effect of a change in price on the quantity demanded and the formula is :
%🔺QD
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What are the categories of elasticity for Price Elasticity of Demand? And their classifications
And what do you have to remember for price elasticity
Perfectly Elastic: Infinity 🔗 Perfectly Inelastic: 0 Elastic: E > 1 Inelastic: E < 1 Unit Elastic: E = 1 And you have to remember absolute value
What is the difference between point Elasticity of Demand and price elasticity of Demand? And when do you use them
Point Elasticity is when you have just one curve given to you with the equation of the curve then you use the slope of the equation to determine elasticity.
Whereas with price elasticity you can figure out the elasticity using the midpoint rule
What is the midpoint rule and why is it needed?
The midpoint rule is determining the % change in price/quantity by using the midpoint between the two endpoints so that going both ways, the answer is the same
What is the midpoint rule formula?
Q2-Q1
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Which types of products are Inelastic and what types of products are Elastic?
Necessities are Inelastic and luxuries are Elastic
What is Elasticity of supply and what is the formula and it’s levels of elasticity?
Elasticity of Supply is the willingness so Supply/ effect on quantity supplied after a change in price
% 🔺QS*
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What is cross elasticity of Demand?
It is the effect on the quantity demanded of one product because of the change in price from another project. It can tell when products are substitutes, complements or not related at all.
Formula for CED
% 🔺QD
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What is Income Elasticity of Demand?
It is the responsiveness of a the demand for a product in relation to a change in income.
% 🔺QD
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What are the levels of elasticity for Income Elasticity and what the type of goods that they apply to?
Normal Good = (+)
-(Inelastic) = (+) > 1 = Necessities
-(Elastic) = (+) < 1 = Luxuries
Inferior Good = (-)
Draw the ( price vs. Quantity) graph for unit elasticity of Supply and of Demand
Supply is just a straight sloping diagonal line
Demand is a curved line that is mostly straight but at the ends goes to infinity, with the middle being unit elastic and the ends been more inelastic(bottom half) and elastic (top half).
The TR vs. Quantity graph is a parabola for unit elasticity
What is the relationship between Total Revenue and Elasticity?
When Demand is elastic,
an increase in price = TR decreases
When Demand is inelastic,
An increase in price = TR increases
When Demand is unit elastic,
An increase in price = TR doesn’t change
Explain why TR falls when price rises and Demand is elastic
TR falls when Demand is elastic because a small % increase in price creates a large % decrease in QD & since QD x P is TR, TR decreases like QD