Elasticity Flashcards

1
Q

What is elasticity? And what are the different types?

A

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

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2
Q

What is the price elasticity of Demand?

What is the formula?

A

The effect of a change in price on the quantity demanded and the formula is :
%🔺QD

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3
Q

What are the categories of elasticity for Price Elasticity of Demand? And their classifications
And what do you have to remember for price elasticity

A
Perfectly Elastic: Infinity 🔗
Perfectly Inelastic: 0 
Elastic: E > 1 
Inelastic: E < 1
Unit Elastic: E = 1
 And you have to remember absolute value
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4
Q

What is the difference between point Elasticity of Demand and price elasticity of Demand? And when do you use them

A

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

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5
Q

What is the midpoint rule and why is it needed?

A

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

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6
Q

What is the midpoint rule formula?

A

Q2-Q1

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7
Q

Which types of products are Inelastic and what types of products are Elastic?

A

Necessities are Inelastic and luxuries are Elastic

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8
Q

What is Elasticity of supply and what is the formula and it’s levels of elasticity?

A

Elasticity of Supply is the willingness so Supply/ effect on quantity supplied after a change in price
% 🔺QS*

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9
Q

What is cross elasticity of Demand?

A

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.

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10
Q

Formula for CED

A

% 🔺QD

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11
Q

What is Income Elasticity of Demand?

A

It is the responsiveness of a the demand for a product in relation to a change in income.
% 🔺QD

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12
Q

What are the levels of elasticity for Income Elasticity and what the type of goods that they apply to?

A

Normal Good = (+)
-(Inelastic) = (+) > 1 = Necessities
-(Elastic) = (+) < 1 = Luxuries
Inferior Good = (-)

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13
Q

Draw the ( price vs. Quantity) graph for unit elasticity of Supply and of Demand

A

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

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14
Q

What is the relationship between Total Revenue and Elasticity?

A

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

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15
Q

Explain why TR falls when price rises and Demand is elastic

A

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

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16
Q

Explain why TR rises when price rises and demand is inelastic

A

TR rises because a small % increase in price will also create a smaller % decrease in QD therefore TR follows the direction of the price and rises with it.

17
Q

Explain why TR stays the same when price rises and demand is unit elastic

A

TR stays the same in this case because a small % rise in price creates the same % fall in QD so TR follows both and by the same % it goes down, it goes up so TR stays the same.

18
Q

How do firms pass on higher costs to consumers? (In what situations?)

A

Firms pass on higher costs especially with addictive substances because they are relatively inelastic like cigarettes.

19
Q

RQ: The federal govt. decided to require automobile manufacturers to install new anti pollution equipment that costs $2000 per car. Under what conditions can car makers pass almost all of this cost along to car buyers? Under what conditions can carmakers pass very little of this cost along to car buyers?

A

If demand is inelastic then carmakers can pass these costs to buyers but if demand is elastic then they can pass very little of this cost to buyers and manufacturers must then pay

20
Q

RQ: Suppose you are in charge of sales at a pharmaceutical company and your firm has a new drug that causes bald men to grow hair. Assume that the company wants to earn as much revenue as possible from this drug. If the elasticity of Demand for your company’s product at the current price is 1.4, would you advise the company to raise the price, lower the price or keep the price the same? What is Elasticity was 0.6? What if it were one? Explain

A

If it were 1.4, you advise the company to lower prices because demand is elastic so the small drop in price will result in a larger rise in QD therefore TR increases.
If it were 0.6 you advise the company to increase prices cuz this means demand is inelastic so a small rise in price only means a small decrease in QD therefore TR increases in all.
If it were 1, you advise the company to keep it the same cuz TR is already maximized

21
Q

What does it mean when Elasticity is 1?

A

It means that TR had been maximized.