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Economics > Elasticity of Demand Supply > Flashcards

Elasticity of Demand Supply Flashcards

1
Q

What is elasticity?

A

It is the measurement of how changing one economic variable affects others

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2
Q

What does elasticity show?

A

It shows responsiveness, eg if the price of a good changes

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3
Q

What happens if the sign is positive?

A

The variables change in the same direction, eg if price falls, demand falls

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4
Q

What happens if the sign is negative?

A

The variables change in opposite directions, eg if price goes up, quantity demanded falls

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5
Q

What does elastic mean?

A

Value is > 1

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6
Q

What does inelastic mean?

A

Value is < 1

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7
Q

What does unit elastic mean?

A

Value is exactly 1

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8
Q

What does complete inelastic mean?

A

Value is 0

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9
Q

What does perfect elastic mean?

A

Value is infinite, eg it is so elastic that we can’t measure it

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10
Q

What is price elasticity of demand?

A

It is the responsiveness of the quantity demanded of a good to a change of its own price

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11
Q

What is the formula to calculate price elasticity?

A

% of quantity demanded divided by the % in the price of the product

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12
Q

What happens if the price elasticity is negative?

A

The demand curve is downward sloping

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13
Q

What happens if the price elasticity is positive?

A

The demand curve is upward sloping (rare occasion)

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14
Q

What happens if elasticity is fairly steep?

A

Value is high

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15
Q

What happens if elasticity is a flat line?

A

Value is low

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16
Q

What are the determinants of price elasticity of demand?

A

How differentiated a product is, the time period involved, brand loyalty, who pays, the type and nature of a product, the % of income spent on the product

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17
Q

What is total revenue?

A

Total consumer expenditure

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18
Q

How do you calculate total revenue?

A

Price x quantity

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19
Q

What does it mean if price elasticity of demand is elastic?

A

Relative change in quantity demanded is more than the relative change in price

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20
Q

What does it mean if price elasticity of demand is inelastic?

A

Relative change of quantity demanded is less than the relative change in price

21
Q

Why is it important for a firm to know if they are on the elastic part or inelastic part of the curve?

A

It shows whether or not total revenue increases or decreases

22
Q

When does maximum total revenue occur?

A

At unit elastic demand

23
Q

What is income elasticity of demand?

A

It is the responsiveness of the quantity demanded of a good to a change of income

24
Q

What is the formula for income elasticity of demand?

A

% change in quantity demand divided by change in income

25
Q

Is the income elasticity positive or negative for normal goods?

A

Positive. As income increases then people will spend more money

26
Q

Is the income elasticity positive or negative for inferior goods?

A

Negative. Instead I buying low brand products, they buy branded products

27
Q

What is cross-price elasticity of demand?

A

It is the responsiveness of the quantity demanded of one product to a change in price of another product

28
Q

What is the formula for cross-price elasticity of demand?

A

% change in quantity demanded for good A divided by % change in price of good B

29
Q

Why might the cross-price elasticity be positive?

A

If the two goods are substitutes

30
Q

Why might the cross-price elasticity of demand be negative?

A

If they are complements

31
Q

Why might the cross-price elasticity be zero?

A

If they are unrelated

32
Q

What is the short run?

A

The period in which at least one input is fixed, eg no. of suppliers

33
Q

What is the long run?

A

The period in which all input is variable

34
Q

What is the law of supply?

A

When the price of a good rises, the quantity supplied rises

35
Q

What happens to the law of supply in the short run?

A

Unit costs tend to rise beyond a certain level of output

36
Q

What happens to the law of supply in the long run?

A

New suppliers will move into the industry to take advantage of the new opportunity to make a profit

37
Q

What does the law of supply tell us?

A

It tells us that the supply curve is upward sloping

38
Q

What does the supply curve show?

A

It shows the relationship between the prices and quantity supplied at all possible prices. It shows an increase in price, a higher quantity is supplied

39
Q

What are the determinants of supply?

A

Price of good, cost, technology, no. of suppliers, profitability of other goods, other

40
Q

What causes a movement along the supply curve?

A

A change in price of a good or quantity supplied

41
Q

What causes a shift of the demand curve?

A

Change in supply (or any other change that’s not price). It shows that as the same price, we have a lower supply

42
Q

What is the industry supply curve?

A

It is the horizontal summation of the individual firms’ supply curves

43
Q

What is the price elasticity of supply?

A

It is the responsiveness of the quantity supplied of a good to a change of its own price

44
Q

What is the formula for price elasticity of supply?

A

% change in quantity supplied divided by % change in the price of the product

45
Q

What happens if the price elasticity of supply is positive?

A

The supply curve is upward sloping

46
Q

What happens if the price elasticity of supply is negative?

A

The supply curve is downward sloping

47
Q

What happens at unit elastic supply?

A

Price elasticity of supply = 1

48
Q

What happens at perfect inelastic supply?

A

Price elasticity of supply = 0

49
Q

What happens at perfect elastic supply?

A

Price elasticity of supply = infinite, horizontal line

Economics (24 decks)

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