Module 4 Flashcards
Is a flatter curve more or less elastic?
A flatter curve is more elastic.
What’s the difference between a perfectly elastic/inelastic curve and one that is just “elastic/inelastic”? What are the associated values of elasticity?
Perfectly elastic: horizontal, # = infinity
Perfectly inelastic: vertical, # = 0
Elastic: has a slope, #>1
Inelastic: has a slope, #<1
What is the basic formula for the price elasticity of demand?
% change in QD/ % change in P
What is the midpoint formula? (give the actual formula)
Is Price Elasticity of Demand negative or positive?
Negative because either the numerator or the denominator are always negative, and never both.
Is a PED of -3 considered greater or lesser than one of -2?
It’s considered greater. We compare absolute values.
Does elasticity stay the same along a linear “curve”?
No - it’s more elastic at the top, unit elastic at the midpoint, and inelastic at the bottom.
What does unit-elastic mean? What’s it’s value?
Unit elastic = -1 or 1, and it means that for every % change in P there’s an equal % change in QD or QS.
What’s the formula for Income Elasticity of Demand?
= %change QD/ %change income
What’s the formula for cross-price elasticity of demand?
= % change in QD (if it’s price stays the same) / % change in P (substitute or compliment)
What are the main causes of demand elasticity?
- Availability of close substitutes
- Passage of time
- Luxury vs necessity
- Definition of market
- The share of the good in the consumer’s budget
How does the passage of time affect elasticity?
Everything is more elastic over time because people need time to adjust and make changes.
What are the values that tell us if something is a luxury vs a necessity?
Luxury:
10% ^ income = >10%^QD
IED >1
Neccesity:
10%^ income =<10%^QD
IED<1
How does the definition of the market affect elasticity?
A more broadly defined market will be more elastic because there’s more substitutes.
How does the share of a good in the consumer’s budget affect elasticity of demand?
If the good takes up a smaller share of the consumer’s budget, they will be less affected by price changes, so their elasticity will be lower.
How is total revenue affected by increasing price when demand is inelastic?
When demand is inelastic, increasing price increases revenue.
How is total revenue affected by increasing price when demand is elastic?
When demand is elastic, increasing price decreases revenue.
How is revenue affected by increasing price when demand is unit elastic?
When demand is unit elastic, increasing price won’t change overall revenue.
How do we calculate the overall revenue change that occurs from a price change?
= Revenue gained - Revenue lost
Where on the demand curve is revenue maximized based on elasticity?
Revenue is maximized at the point where demand becomes unit elastic.
What are the three types of demand elasticity?
Price
Cross-price
Income
What is the formula for the cross-price elasticity of demand?
***** % change in quantity assuming the price of the first good (numerator) stays the same.
What does it mean if the cross-price elasticity of demand is positive?
If the cross price elasticity of demand is positive the goods are substitutes.
What does it mean if the cross-price elasticity of demand is negative?
If the cross-price elasticity of demand is negative then the goods are compliments.
What does it mean if the cross price elasticity of demand is equal to zero?
If the cross price elasticity of demand is equal to zero, the goods are not related.
What is the formula for the income elasticity of demand?
What tells us that a good is a luxury?
a) 10% increase in income = greater than 10% increase in QD
b) income elasticity will be positive
c) income elasticity will be greater than 1
What tells us that a good is a necessity?
a) 10% increase in income = less than 10% increase in QD
b) income elasticity will be positive
c) income elasticity will be less than 1
What tells us that a good is inferior?
a) QD falls when income increases
b) income elasticity will be a negative number.
What is the formula for the price elasticity of supply?
What affects the price elasticity of supply?
- Ability and willingness of firms to alter production as price changes:
- Time
- Availability of inputs and their elasticity of supply
