Module 4 Video/Other Flashcards
Explain the price elasticity of demand formula.
Elasticity is short for price elasticity of demand. The triangle means change. So it’s the % (change of) Q=Quantity divided by the % (change in) P=price
If the change in price is positive, the change in quantity demanded has to be ____________ and vice versa.
Negative BUT we are actually so sure that it is going to be negative that we actually take the absolute value which makes the answer positive.
(AKA it is always negative but the answer will always be positive because we just take the absolute value.)
If you have a zero on top of your fraction when solving a price elasticity of demand formula, then your answer is….
0, a perfect inelastic demand curve. (Vertical curve)
Meaning they can change their price a ton and the quantity demanded will still stay the same. (ex: emergency medical response)
What would it mean to have the price elasticity of demand curve be represented as a horizontal curve?
It means it’s a perfectly elastic demand curve. It cannot be defined but will be pretty close to infinity.
Means they can sell as much as they want at the going price but cannot raise their price at all.
What factors shift the demand curve?
Income and the prices of related goods
Explain income elasticity of demand.
How quantity demanded changes when income changes. Calculated by the percentage change in quantity by the percentage change in income
%(change)Q/%(change)I
We are just concerned over whether it’s positive or negative (Do not ignore the negatives on income elasticity of demand)
Percentage change in quantity demanded / Percentage change in income
Explain cross elasticity of demand.
Looks at the percentage change in the quantity of good X divided by the percentage change of a different good- good Y. and measures the responsiveness of a change in good quantity resulting from a change in price of a different good. And we’re also concerned over whether it’s positive or negative.
%(change)Qx/%(change)Py
Percentage change in quantity demanded of product x / percentage change in price of product y
Price elasticity of demand, income elasticity of demand, and cross elasticity of demand all have what in the numerator?
%(change)Q
(Percentage change quantity)
(Denominator changes based on what type of elasticity we’re looking at - In price elasticity of demand, the denominator is the percentage change in price. For income elasticity of demand, the percentage change in income is on the denominator. For cross price elasticity, the price of another good is in the denominator.
