elasticity Flashcards
what is price elasticity of demand?
measures how sensitive is the quantity demanded to a change in price
Price elasticity of demand = percentage change in quantity/ demanded percentage change in price
what is inelastic demand?
qty demanded is insensitive to a change in price
how to calculate the elasticity of demand coefficient?
% change in qty / % change in price
what is elastic demand?
qty demanded is sensitive to a change in price
what is the elasticity of demand coefficient = 1?
e.g. 20% decrease/ 20% increase = 1
this product has unit elastic demand
what kind of elasticity does a vertical line have?
perfectly inelastic demand
where % change in qty (0) / % change in price = 0
Price changes have no influence on qty
what kind of elasticity does a horizontal line have?
product has perfectly elastic demand
firm cannot change the price at all.
Therefore,
% change in qty / % change in price (0) = infinity
what are the different kind of elasticities? What are the elasticity coefficients?
how do you calculate the total revenue?
price x qty
what test can you use to test elasticity?
the total revenue test
what can you deduce from the total revenue test?
what is the elasticity of supply
how sensitive is the qty supplied to a change in price
what is inelastic supply?
qty supplied is insensitive to a change in price
(e.g. electricity in the short run)
what is elastic supply?
sensitive to changes in price
easy to produce more
cross-price elasticity of demand
how sensitive the qty of one product is to a change in the price of a different product
these products are either substitutes or complements
what can you conclude from cross-elasticity of demand?
what does income elasticity of demand show?
how sensitivity the qty of demand for a product is to a change in income
how to calculate income elasticity of demand?
% change in qty/ % change in income
how does supply impact influence elastic and inelastic demand graphs?
High price elasticity of demand: decrease in supply –> small rise in price
Low price elasticity of demand: decrease in supply –> big rise in price
why is a large increase in price needed where there is low elasticity of demand when there is a change in supply?
when the elasticity is very low, a large increase in price is needed to get people to reduce their use of a good and bring the quantity demanded down to the quantity supplied.
why is there only a small rise in price in a case where there is high elasticity of demand when there is a change in supply?
when the elasticity is very high, then only a small increase in the price is enough to get people to reduce their use of a certain product and thereby bring the quantity demanded down to the lower quantity supplied.
A given shift of the supply curve will have a larger impact on
equilibrium quantity (and a smaller impact on equilibrium price) when the elasticity of demand is higher.
What is the arc elasticity of demand?
apply the arc elasticity of demand
different types of elasticities and the elasticity of demand coefficients
how can elasticity affect revenue?
what does an increase in price and the effect it has on revenue look like?
when elasticity is greater than 1
when elasticis is less than 1
what influences price elasticitiy of demand?
- degree of substitutability (this may be influenced by necessity or luxury)
- necessity or luxury
- fraction of income
- temporary v permanent (discounts will increase price elasticity of demand)
- Long-Run versus Short-Run Elasticity
describe how the time after the price change can influence the price elasticity of demand?
Frequently the price elasticity of demand is low immediately after a price change (people have not adjusted or it may be difficult to break habits (increase in tobacco price)) but then increases after a period of time has passed. (enough time to make adjustments or change habits)
Whereas the price elasticity of demand refer to ______,
the income elasticity of demand refers to
Whereas the price elasticity of demand refers to movements along the demand curve, the income elasticity of demand refers to shifts in the demand curve caused by changes in income.
distinguish between high and low price elasticities of supply
A high price elasticity of supply means that firms raise their production by a large amount if the price increases. (qty very responsive to price change)
A low price elasticity of supply means that firms raise their production only a little if the price increases. (qty supplied insensitive to price change)
how do you calculate the price elasticity of supply
what is perfectly elastic supply?
the price does not change at all. It is the same regardless of the quantity supplied.
a small increase in price brings forth a huge increase in the quantity supplied by firm
what is perfectly inelastic supply?
The vertical supply curve is perfectly inelastic; it has zero elasticity.
indicating no response of quantity supplied to a change in price
For example, there is only one Mona Lisa. A higher price cannot bring about a higher quantity supplied
describe how different price elasticities of supply will respond to a shift to demand
If the price elasticity of supply is high, there will be a small change in price. If the price elasticity of supply is low, there will be a large change in price.
luxury goods have
what are determinants of supply elasticity?
- ease at which suppliers can increase output i.e. capacity constraints
- supply is usually more price sensitive over time
when to use the arc elasticity of demand?
when there is a large change in price
what is another way to express elasticity of demand?
slope = m
when to use the point elasticity of demand?
when there is a small change in price
y=mx + b
also is
P = mQD + B
what happens to revenue
if elastic
cross price elasticity of demand
elasticity
Inferior goods < 0
normal goods > 0
- necessity
- luxury>1
