Price Elasticity Of Demand Flashcards
List determinants of price elasticity of demand
- Availability of close substitutes
- Passage of time
- Luxuries vs necessities
- how narrowly the market for the good is defined
- the share of the good in the consumers budget
How do substitutes affect the price elasticity of demand
If a product has more substitutes, the price elasticity of demand will be more elastic. If it has less substitutes, it will be less elastic
How does time affect the price elasticity of demand
The more time that passes the more elastic the demand for the product will become
How do luxuries and necessities affect the price elasticity of demand
The demand curve for luxury is more elastic than the demand curve for necessities
what is elasticity
Elasticity measures how much one economic variable responds to changes in another economic variable
what is the price elasticity of demand?
The price elasticity of demand measures how responsive the quantity demanded is to changes in price. The price elasticity of demand is equal to the percentage change in quantity demanded divided by the percentage change in price
if the quantity demanded changes more than proportionally when price changes then demand is
elastic
elastic demand is ___ than one in absolute value
more
inelastic demand is ___ than 1 in absolute value
less
if the quantity demanded changes less than proportionally when price changes, then demand is _____
inelastic
If the quantity demanded changes proportionally when price changes, the price elasticity of demand is equal to 1 in absolute value demand is _______
unit elastic
what is perfectly inelastic demand?
when a change in price results in no change in the quantity demanded
perfectly inelastic demand curve is _____
vertical
perfectly elastic demand curve is ______
horizontal
what is perfectly elastic demand ?
when a change in price results in an infinite change in the quantity demanded
what affect will inelastic demand have on total revenue?
a decrease in price will result in a decrease in total revenue and an increase in price will increase total revenue
what affect will elastic demand have on total revenue?
When demand is elastic, a decrease in price increases total revenue and an increase in price decreases total revenue.
what affect will unit-elastic demand have on total revenue?
increases or decreases in price will cause total revenue to remain unchanged
what is cross-priced elasticity?
The percentage change in quantity demanded of one good or service divided by the percentage change in the price of another good or service.
what does it mean when the cross-priced elasticity is positive?
An increase in the price of a substitute will lead to an increase in quantity demanded of the first good
what does it mean when the cross-priced elasticity is negative?
An increase in the price of a complement will lead to a decrease in the quantity demanded of the first good
what is the cross-price elasticity of related goods?
0
what is income elasticity of demand?
A measure of the responsiveness of quantity demanded to changes in income, measured by the percentage change in quantity demanded divided by the percentage change in income.
if the income elasticity of demand is positive but less than 1 then the good is…
normal and a necessity
if the income elasticity of demand is positive but more than 1 then the good is…
normal and a luxury
if the income elasticity of demand is negative then the good is…
inferior
What is the price elasticity of supply?
is equal to the percentage change in quantity supplied divided by the percentage change in price. The supply curves for most goods are inelastic over a short period of time, but they become increasingly elastic over longer periods of time
