Lecture 11 - Elasticity Flashcards
What is an elasticity?
An elasticity is the percentage change in one variable due to a percentage change in another variable
What notation is often used to represent PED?
PED is often denoted using epsilon subscript D
What is the formula used to calculate PED?
PED is calculated using the formula: PED = Percentage change in quantity demanded / Percentage change in price
State the general form of a linear demand function
A linear demand function has the form q = a - bp
State the formula used to calculate the PED of a linear demand function using differentiation
PED = dq/dpp/q = -bp/q
Draw a demand curve and show how the PED changes along the demand curve
See slide 9 of lecture 11
Draw a constant-elasticity demand curve
See slide 10 of lecture 10
What is the general form of a constant elasticity demand curve?
q = Ap^-b
State the formula for calculating the PED for a constant-elasticity demand curve
PED = dq/dp*p/q = -b
State the different types of PED and by which values they are represented by
Inelastic: 0<PED<1
Unit elastic: PED = +-1
Elastic: PED<-1 or PED>1
What do price elasticities of demand allow us to do?
Price elasticities of demand allow us to predict how expenditure on a good changes with price
What is quantity a function of?
Quantity is a function of price
If the price of a good increases, how will total revenue change for different elasticites?
Total revenue increases if demand is inelastic and decreases if demand is elastic
State the formula used to calculate the income elasticity of demand
YED = dq/dy*y/q
What value of YED represents a normal good, a luxury good and an inferior good?
Normal good: YED>0
Luxury good: YED>1
Inferior good: YED<0
