lecture 3 Flashcards
What is elasticity in the context of economics?
Responsiveness of one variable to a change in another
Helps us understand how markets respond to changes in demand or supply.
Define price elasticity of demand (PeD).
Responsiveness of demand to a change in price
Specifically for an individual firm in a competitive market.
What does a demand curve under perfect competition indicate?
The demand for an individual firm’s product
What is the significance of measuring price elasticity of demand?
Determines the effect on price of a shift in supply depending on the responsiveness of demand to a change in price.
How is price elasticity of demand measured?
Use of percentage changes, the sign (positive or negative), and the value (ignoring the negative sign): greater or less than 1.
What indicates elastic demand?
ε > 1
What indicates inelastic demand?
ε < 1
What indicates unit elastic demand?
ε = 1
If the price of good X rises from £9 to £11 and quantity demanded falls from 100 to 60, what is the price elasticity of demand?
Requires calculation using the formula for price elasticity.
What is the relationship between the number of substitute goods and elasticity?
The closer the substitutes, the more elastic the demand.
How does the proportion of income spent on a good affect its elasticity?
The greater the proportion, the larger the elasticity of demand.
What role does time play in price elasticity of demand?
More time to adjust to a price change makes demand more elastic.
What is the importance of price elasticity of demand to business decision making?
It affects a firm’s sales revenue (TR = P x Q).
In the case of elastic demand, how does total revenue change with price?
TR changes in the same direction as quantity.
In the case of inelastic demand, how does total revenue change with price?
TR changes in the same direction as price.
What is totally inelastic demand?
PeD = 0
What is infinitely elastic demand?
PeD = -∞
If demand drops to zero at the slightest increase in price, what type of demand is this?
Perfectly elastic demand.
What is income elasticity of demand?
Measurement of how much the quantity demanded of a good responds to a change in consumer income.
What factors determine income elasticity of demand?
Degree of necessity of the good, rate at which desire is satisfied, level of income of consumers.
What is cross-price elasticity of demand?
Measurement of how the quantity demanded of one good responds to a change in the price of another good.
What determines cross-price elasticity of demand?
Closeness of complements or substitutes, time period.
What happens to demand in the short run versus the long run?
Demand is more elastic in the long run.
How does speculation affect market prices?
Speculation is self-fulfilling.
