Price Elasticity Flashcards
What is Price Elasticity of Demand (Ped)
A measure of how much Qd of a good responds to a change in P of that good.
What is Elasticity?
A measure of the responsiveness of Qd to one of its determinants.
What is the equation for (Ped)
(πππππππ‘πππ πβππππ ππ ππ) /(πππππππ‘πππ πβππππ ππ π)
Midpoint method.
Ped = ((π2βπ1)/[(π2+π1)/2])/((π2βπ1)/[(π2+π1)/2])
What does elastic mean (Demand)
Demand is said to be elastic if a percentage increase (decrease) in price, leads to more than a percentage decrease (increase) in quantity: Ped > 1. (Small slope)
What does inelastic mean (demand)
Demand is said to be inelastic if a percentage increase (decrease) in price, leads to less than a percentage decrease (increase) in quantity: Ped < 1 (steep slope)
What is unit elastic?
If Ped = 1, demand is said to be unit elastic.
What is income elasticity of demand?
How responsive is the demand of a good to a change in income.
What is Cross price elasticity of demand?
How responsive is the demand of a good to a change in the price of another good.
Price elasticity of supply
How responsive is the supply of a good to a change in the price of that good.
What determines how elastic demand for a good is?
- Availability of close substitutes
- Necessities vs luxuries
- How narrowly we define the market
- Time horizon
What is the inelastic demand equation?
Ped < 1
What is the elastic demand equation?
Ped > 1
What is Total Revenue?
The amount paid by buyers and received by sellers. TR = P x Q
What is income elasticity of demand?
A measure of how much Qd responds to a change in consumerβs income (Y)
What is the Equation for (Yed)
% change in Qd/% change in Y
Cross-price elasticity of demand
A measure of how much the Qd of one good responds to a change in price of another good.
What is the equation for Cross price elasticity of demand. (CPed)
% chg in Qd of good 1/% chg in P of good 2
What is price elasticity of supply? (PeS)
A measure of how much the Qs of a good responds to a change in the price of that good.
When is supply more elastic?
When inventories are high
When there is spare capacity
When it is easy to hire more workers
(PeS) likely to be higher in the long run
What are price controls?
When the govt controls prices, rather than let the market determine prices.
What is a price floor?
A legal minimum on the price at which a good can be sold.
What is a price ceiling?
A legal maximum on the price at which a good can be sold.
