Elasticity (Exam 2) Flashcards
1
Q
Elasticity
A
Measure of responsiveness between any two variables
2
Q
Price elasticity of demand
A
How responsive quantity is to a change in the good’s price
3
Q
Elastic demand
A
- When given % change in price of good causes an increase in the % change in Qd of good
- |E| > 1
4
Q
Inelastic demand
A
- When given a % change in price of good causes an smaller % increase change in Qd
- |E| < 1
5
Q
Perfectly inelastic demand
A
- Qd does not respond at all when price of good changes
- Vertical demand curve
- %∆Qd = 0
6
Q
Perfectly elastic demand
A
- Goods have a horizontal curve; price does not change along demand curve
- If price increases, Qdemand would fall to 0
- If price decreases, Demand would go infinity
- E = infinity
7
Q
Unit Elastic Demand
A
Percent change in good’s price is equal to corresponding percent change in Qd for the good
8
Q
Elasticity Coefficient (E)
A
- Indicate whether demand is elastic or inelastic
- %∆Qd / %∆P = percent change in quantity demanded over the percent change in price
9
Q
Total Revenue
A
- Amount of $ earned when supplier sells given quantity of goods
- TR = P•Q
10
Q
Elasticity and TR: Inelastic Demand
A
- |%∆P| > |∆Qd|
- Decrease P : Increase Q : Increase TR
- Increase P : Decrease Q : Increase TR
11
Q
Elasticity and TR: Elastic Demand
A
- |%∆P| < |%∆Qd|
- Decrease P : Increase Q : Increase TR
- Increase P : Decrease Q : Decrease TR
12
Q
Determinants of Price Elasticity of Demand
A
- Availability of substitutes
- Luxury vs. necessary goods
- Length of time available to adjust to price change
- Portion of income spent on good
13
Q
Availability of goods
A
- People respond to increase in price of one good by substituting good whose prices have not changed
14
Q
Luxury v. Necessary Goods
A
- Necessities: Increase in price does not change demand
- Luxury: Increase in price causes a cut in demand
15
Q
Length of time available to adjust to price change
A
- Make adjustments if possible (increase in gas prices–>carpool, etc.)
- Cannot adjust immediately
