Elasticity of Demand Supply Flashcards
What is elasticity?
It is the measurement of how changing one economic variable affects others
What does elasticity show?
It shows responsiveness, eg if the price of a good changes
What happens if the sign is positive?
The variables change in the same direction, eg if price falls, demand falls
What happens if the sign is negative?
The variables change in opposite directions, eg if price goes up, quantity demanded falls
What does elastic mean?
Value is > 1
What does inelastic mean?
Value is < 1
What does unit elastic mean?
Value is exactly 1
What does complete inelastic mean?
Value is 0
What does perfect elastic mean?
Value is infinite, eg it is so elastic that we can’t measure it
What is price elasticity of demand?
It is the responsiveness of the quantity demanded of a good to a change of its own price
What is the formula to calculate price elasticity?
% of quantity demanded divided by the % in the price of the product
What happens if the price elasticity is negative?
The demand curve is downward sloping
What happens if the price elasticity is positive?
The demand curve is upward sloping (rare occasion)
What happens if elasticity is fairly steep?
Value is high
What happens if elasticity is a flat line?
Value is low
What are the determinants of price elasticity of demand?
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
What is total revenue?
Total consumer expenditure
How do you calculate total revenue?
Price x quantity
What does it mean if price elasticity of demand is elastic?
Relative change in quantity demanded is more than the relative change in price
What does it mean if price elasticity of demand is inelastic?
Relative change of quantity demanded is less than the relative change in price
Why is it important for a firm to know if they are on the elastic part or inelastic part of the curve?
It shows whether or not total revenue increases or decreases
When does maximum total revenue occur?
At unit elastic demand
What is income elasticity of demand?
It is the responsiveness of the quantity demanded of a good to a change of income
What is the formula for income elasticity of demand?
% change in quantity demand divided by change in income
Is the income elasticity positive or negative for normal goods?
Positive. As income increases then people will spend more money
Is the income elasticity positive or negative for inferior goods?
Negative. Instead I buying low brand products, they buy branded products
What is cross-price elasticity of demand?
It is the responsiveness of the quantity demanded of one product to a change in price of another product
What is the formula for cross-price elasticity of demand?
% change in quantity demanded for good A divided by % change in price of good B
Why might the cross-price elasticity be positive?
If the two goods are substitutes
Why might the cross-price elasticity of demand be negative?
If they are complements
Why might the cross-price elasticity be zero?
If they are unrelated
What is the short run?
The period in which at least one input is fixed, eg no. of suppliers
What is the long run?
The period in which all input is variable
What is the law of supply?
When the price of a good rises, the quantity supplied rises
What happens to the law of supply in the short run?
Unit costs tend to rise beyond a certain level of output
What happens to the law of supply in the long run?
New suppliers will move into the industry to take advantage of the new opportunity to make a profit
What does the law of supply tell us?
It tells us that the supply curve is upward sloping
What does the supply curve show?
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
What are the determinants of supply?
Price of good, cost, technology, no. of suppliers, profitability of other goods, other
What causes a movement along the supply curve?
A change in price of a good or quantity supplied
What causes a shift of the demand curve?
Change in supply (or any other change that’s not price). It shows that as the same price, we have a lower supply
What is the industry supply curve?
It is the horizontal summation of the individual firms’ supply curves
What is the price elasticity of supply?
It is the responsiveness of the quantity supplied of a good to a change of its own price
What is the formula for price elasticity of supply?
% change in quantity supplied divided by % change in the price of the product
What happens if the price elasticity of supply is positive?
The supply curve is upward sloping
What happens if the price elasticity of supply is negative?
The supply curve is downward sloping
What happens at unit elastic supply?
Price elasticity of supply = 1
What happens at perfect inelastic supply?
Price elasticity of supply = 0
What happens at perfect elastic supply?
Price elasticity of supply = infinite, horizontal line
