Elasticity - Price Flashcards
the law of demand tell us there is an ________ relationship between price and quantity demanded
inverse
what is elasticity?
a measure of how sensitive consumers are to price changes
define an elastic curve
increase in price reduces quantity demanded a lot
define an inelastic curve
increase in price reduces quantity demanded slightly
define price elasticity of demand
%changeP
how do we calculate %change? (simple)
Initial Q/P
how do we calculate %change? (midpoint)
changeQ/P
—————– x100
Avg. X
how do we calculate average value of X?
2
If |Ed| > 1…
elastic
If |Ed| < 1…
inelastic
If |Ed| = 1…
unit elastic
If |Ed| curve is vertical…
perfectly inelastic (0)
If |Ed| curve is horizontal…
perfectly elastic (infinity)
how to calculate total revenue?
TR = P x Q
when demand is inelastic, the ____________ dominate the __________
price effect, quantity effect
when demand is elastic, the ____________ dominate the __________
quantity effect, price effect
when inelastic, total revenue will __________ when prices increases
increase
when elastic, total revenue will __________ when prices increases
decrease
when unit elastic, the quantity effect ____ the price effect so a price increase ______ the reduction in quantity demanded, so total revenue ____
equals, balances, is unaffected
what factors affect Price Elasticity of Demand?
1) availability of close substitutes
2) whether good is necessity/luxury
3) share of income spent on good
4) length of time elapsed since price change
how does availability of substitutes affect PeD?
fewer substitutes - harder for consumers to limit Q when P changes (inelastic)
many substitutes - easier for consumers to switch when P changes (elastic)
how does whether good is necessity/luxury affect Ped?
necessities - Q changes little when P changes
luxuries - more sensitive to P changes
how does share of income spent on good affect PeD?
less sensitive to P changes when good feels cheap (opposite when feels expensive)
how does length of time since P change affect PeD?
less time = more elasticity, can find substitutes
