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ECO1017 > Elasticity and its applications > Flashcards

Elasticity and its applications Flashcards

1
Q

Define elasticity

A

A measure of how much buyers and sellers respond to changes in market conditions

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2
Q

What does elasticity allow?

A

Greater accuracy when analysing supply and demand

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3
Q

Define price elasticity of demand

A

A measure of how much the quantity demanded of a good responds to a change in the price of that good.

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4
Q

List 5 determinants in the price of elasticity of demand

A 
Availability of close substitutes
Necessities versus luxuries
Definition of the market
Proportion of income devoted to the product
Time horizon
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5
Q

How can you calculate the price elasticity of demand?

A

%change in quantity demanded/ % change in price

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6
Q

In what direction is the price elasticity of demand shown and why?

A

Downward slope because it is always negative

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7
Q

Why is it harder to measure price elasticity in real life?

A

It is difficult to distinguish between cause and correlation

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8
Q

What is the value of perfectly price inelasticity?

A

Ed=0

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9
Q

What is meant when something is perfectly price inelastic?

A

Quantity demanded does not respond to price changes

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10
Q

What is the value of perfectly price elacticity?

A

Ed= infinity

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11
Q

What is meant if something is perfectly price elastic?

A

Quantity demanded changes infinitively with any change in price

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12
Q

What is the value of unit price elasticity?

A

Ed= -1

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13
Q

What is meant if something is unit price elastic?

A

Quantity demanded changes by the same percentage as the price

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14
Q

What type of curve shows price inelastic demand?

A

Steep curves

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15
Q

What is meant by price inelastic demand?

A

Quantity demanded does not respond strongly to price changes

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16
Q

What is the absolute value of price inelastic demand?

A

Ed= less than 1 (between 0 and 1)

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17
Q

What type of curve shows price elastic demand?

A

Flat curves

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18
Q

What is meant by price elastic demand?

A

Quantity demanded responds strongly to changes in price

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19
Q

What is the absolute value of price elastic demand?

A

Ed= more than 1

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20
Q

What is meant by total expenditure?

A

The amount paid by buyers

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21
Q

How can you work out total expenditure?

A

price of good x quantity purchased

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22
Q

What is meant by total revenue?

A

The amount received by sellers

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23
Q

How can you calculate the total revenue?

A

price of good x quantity sold

24
Q

What happens to the total revenue when the price increases if the demand of the good is price inelastic?

A

An increase in price leads to a decrease in quantity that is proportionately similar. This causes the total revenue to increase.

25
Q

What happens to the total revenue when the price increases if the demand of the good is price elastic?

A

An increase in price leads to a decrease in quantity demanded that is proportionately larger, causing the total revenue to decrease.

26
Q

Define income elasticity of demand

A

This measures how much the quantity demanded of a good responds to a change in the consumer’s income

27
Q

How can you calculate the income elasticity of demand?

A

%change in quantity demanded / %change in income

28
Q

What type of price elasticty do normal goods have?

A

More than one

29
Q

What type of price elasticity do inferior goods have?

A

Less than one because as income increases demand for inferior goods decreases

30
Q

What effect does a higher income have on the quantity demanded?

A

Higher income raises the quantity demanded for normal goods but lowers the quantity demanded for inferior goods

31
Q

What type of elastcity do goods that are viewed as necessities have?

A

They tend to be price inelastic

32
Q

What type of elasticity do goods that are viewed as luxuries have?

A

They tend to be income elastic

33
Q

Define cost-price elasticity of demand

A

This measures how much the quantity demanded of one good responds to a change in the price of another

34
Q

How can you calculate the cost-price elasticity of demand?

A

%change in quantity demanded of good 1 / % change in price of good 2

35
Q

What type of price elasticities are substitutes expected to have?

A

They are expected to have positive price elasticities

36
Q

What type of price elasticities are complements expected to have?

A

Negative price elasticities

37
Q

Define price elasticity of supply

A

A measure of how much the quantity supplied of a good responds to a change in the price of that good

38
Q

How can you calculate the price elasticity of supply?

A

% change in quantity supplied / % change in price

39
Q

What does the elasticity equal for perfectly price inelastic supply?

A

Elasticity equals zero

40
Q

What happens to the supply of goods that are perfectly price inelastic when the price increases?

A

An increase in price leaves the quantity supplied unchanged

41
Q

What is the elasticity for price inelastic supply?

A

Less than 1

42
Q

What happens to the supply of goods that are price inelastic when the price increases?

A

There is an increase in the quantity supplied but this is less than the increase in price

43
Q

What does the elasticity equal for unit elastic supply?

A

Elasticity equals 1

44
Q

What happens to the supply of goods that are unit supply elastic when the price increases?

A

The quantity supplied increases by the same amount

45
Q

What is the elasticity for price elastic supply?

A

Elasticity is greater than 1

46
Q

What happens to the supply of goods that are price elastic when the price increases?

A

The supply increases more than the price

47
Q

What is the elasticity for perfectly price elastic supply?

48
Q

What happens to the supply of a perfectly price elastic good if the price increases?

A

The quantity supplied is infinite

49
Q

What happens to the supply of a perfectly price elastic good if the price stays the same?

A

The producers will supply any quantity

50
Q

What happens to the supply of a perfectly price elastic good if the price decreases?

A

The quantity supplied is zero

51
Q

What are 5 determinants of price elasticity of supply?

A 
Time period
Productive capacity and the ability of sellers to change the amount of good they produce
Size of firm or industry
Mobility of the factors of production
Ease of storing stock or inventories
52
Q

Is the supply of beach front land price elastic or inelastic?

53
Q

How does the time period affect the price elasticity of supply?

A

Supply is more price elastic in the long run

54
Q

Why is demand for farm produce inelastic?

A

Increased productivity in farming has led to lower revenues for farmers as there has been a considerable rise in supply but only a small rise in demand, resulting in lower prices for farmers.

55
Q

What is the price like for peak train tickets?

A

Price is inelastic so tickets are expensive

56
Q

What is the price like for off peak train tickets?

A

Price is elastic so prices are lowered.

ECO1017 (16 decks)

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