Elasticity Flashcards
Elasticity > 1
Elastic: Very sensitive to price change
Elasticity < 1
Inelastic: Not sensitive to price change
Elasticity = 1
Unit Elastic: Price changes 1%, Quantity Demanded changes 1%
A good with many close substitutes is likely to have elastic demand because
If the price rises, consumers can choose to purchase one of the close substitutes instead.
Pepsi v. Coke Example
Price elasticity of demand measures
how responsive the quantity demanded of a good is to changes in price
The demand slope for greater elasticity is
flatter
Income Elasticity of Demand
income elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in income
an increase in income will lead to an increase in the quantity demanded; therefore, for normal goods, the income elasticity of demand is positive. It doesn’t matter whether the numerical value of the income elasticity of demand is greater than 1 or less than 1; all that matters is its sign
Cross-Price Elasticity of Demand
the percentage change in quantity demanded of one good divided by the percentage change in the price of a related good
In order to determine whether goods are complements or substitutes, it doesn’t matter whether the numerical value of the cross-price elasticity of demand is greater than 1 or less than 1; all that matters is its sign.
Negative = Complements Positive = Substitutes
Supply Curve Elasticity
The percentage change in quantity supplied for a given percentage change in price
Perfectly Inelastic Curve
If price goes down and there is no change in quantity demanded, then the buyer is totally insensitive to a price change and the demand curve is vertical or perfectly inelastic.
Elasticity Effects on Revenue
Increase in Price = Increased Revenue for inelastic demand
Increase in Price = Decreased Revenue for Elastic Demand
Perfectly Elastic Curve
If price changes, quantity demanded changes infinitely. Buyer is completely sensitive to the price and demand curve is horizontal.
