Lecture 7 Flashcards
Formula for income elasticity of demand
%change in Q/ % change in Income
describe income elasticity of demand
The income elasticity of demand measures how the
quantity demanded of a good responds to a change in income, other things remaining the same.
describe “income elastic”
This means the income elasticity of demand is greater than 1, demand is income elastic and the good is “normal”
Describe “income inelastic”
This means the income elasticity of demand is greater than zero but less than one, demand is inelastic, and good is “normal.”
Describe “negative”
Income elasticity is less than zero and the good is “inferior”
Describe cross elasticity of demand
The measures of the responsiveness of demand for a good to change in the price of a substitute or a complement good.
formula for cross elasticity of demand
%change in Q/ %change in P (other good)
The cross elasticity of demand between two substitutes is…
positive (skis &snowboard)
The cross elasticity of demand between complements is…
Negative (Coffee & Cream)
describe price elasticity of supply
The elasticity of supply measures the responsiveness of the quantity supplied
to a change in the price of a good when all other influences on selling plans
remain the same.
Formula to calculate the elasticity of supply
%change in Q supplied/ %change in price
Elasticity of supply is “perfectly elastic” when…
Magnitude is infinity, the smallest possible increase in price causes a huge increase in quantity supplied./
Elasticity of supply is “elastic” when…
Magnitude is less than infinity but greater than 1; the percent increase in quantity supplied exceeds the percent increase in the price.
Elasticity of supply is “ unit elastic” when…
Magnitude is one, the percent increase in quantity supplied equals the percent increase in price
Elasticity of supply is “inelastic” when…
Magnitude is greater than zero but less than one, the percent increase in quantity supplied is less than the percent increase in the price