Microecon chapter 4 Flashcards
Elastic demand
- Quantity demanded responsive to change in price
Inelastic demand
Quantity demanded unresponsive to change in price
Elasticity relative to the equilibrium
Less change in equilibrium price and greater change in equilibrium quantity for any shift on supply curve
Total revenue of inelastic demand
TR↑ as P↓
TR↑ as Q↑
Total revenue of elastic demand
TR↓ as P↑
TR↓ as Q↓
Price of elasticity demand formula
(ΔQd / ΔP) x (Pavg/Qdavg)
Price of elasticity demand (η)
The responsiveness of Qd to a change in price all things equal
Do we ignore the negative sign when measuring the price elasticity?
Yes
Does a negatively sloped linear demand curve have a constant elasticity?
No
%ΔQ > %ΔP
Elastic (η > 1)
%ΔQ < %ΔP
Inelastic (η < 1)
%ΔQ = %ΔP
Unit elastic (η = 1)
Are P and η positively related?
Yes
Demand is elastic if
Price↓ -> TR↑
Demand is inelastic if
Price↓ -> TR↓
Demand is unit elastic if
ΔP -> no ΔTR
Determinant of η (3)
- Availability of substitute (greater sub. -> more elastic)
- Importance in consumer budget (more important -> more elastic)
- Time period (more time -> more elastic)
Elasticity of supply
Mesure the responsiveness of Qs and ΔP
Elastic supply
Responsive to change in price
Inelastic supply
Unresponsive to change in price
Elasticity of supply formula
(ΔQs / ΔP) x (Pavg/Qsavg)
ηs depends on… (2)
- Ease of factor substitution (better sub => more elastic)
- Short run and Long run (SR: immediate response to a ΔP. LR: response of Qs given ΔP, and producers can adjust capacity)
Excise tax (2)
- Rise price paid by consumers and reduce price received by producers
- Difference between price paid by consumer and price received by seller
Tax incidence
Question of who bears the burden of a tax
Who bears the burden of a tax?
Depends on the relative elasticities of supply and demand
Cross price elasticity
The responsiveness of the demand for a good to the change in price of a substitute or complement
Cross price elasticity formula (ηxy)
(ΔQx / ΔPy) x (Py avg/Qx avg)
If ηxy > 0 …
Substitute
If ηxy < 0 …
Complement
Income elasticity
Mesures the responsiveness of demand to change in income
Income elasticity formula (ηy)
(ΔQ / ΔI) x (I avg/Q avg)
If ηy > 0 …
Normal good
If ηy < 0 …
Inferior good
If ηy > 1…
Luxury
If 0 ≤ ηy ≤ 1…
Necessity
True or false? The more necessary an item is in the consumption pattern of consumers, the greater is its income elasticity
False
General rule of incidence of tax
The more elastic (inelastic) is supply/demand, the lesser (more) is the burden of a tax
