Principles of Economics Chapter 5 Flashcards
Elasticity
elasticity
A general concept used to quantify the response in one variable when another variable changes.
elasticity of A wrt B =
%ΔA / %ΔB
price elasticity of demand
The ratio of the percentage of change in quantity demanded to the percentage of change in price; measures the responsiveness of quantity demanded to changes in price.
perfectly inelastic demand
Demand in which quantity demanded does not respond at all to a change in price.
perfectly elastic demand
Demand in which quantity drops to zero at the slightest increase in price.
elastic demand
A demand relationship in which the percentage change in quantity demanded is larger than the percentage change in price in absolute value (a demand elasticity with an absolute value greater than 1).
inelastic demand
Demand that responds somewhat, but not a great deal, to changes in price. Inelastic demand always has a numerical value between zero and 1.
unitary elasticity
A demand relationship in which the percentage change in quantity of a product demanded is the same as the percentage change in price in absolute value (a demand elasticity of 1).
% change in quantity demanded =
(change in quantity demanded / Q1) x 100% = ((Q2 - Q1) / Q1) x 100%
price of elasticity of demand =
% change in quantity demanded / % change in price
midpoint formula
A more precise way of calculating percentages using the value halfway between P1 and P2
for the base in calculating the percentage change in price and the value halfway between Q1 and Q2 as the base for calculating the percentage change in quantity demanded.
midpoint formula
% change in quantity demanded = (change in quantity demanded / Q1) x 100% = ((Q2-Q1) / Q1) x 100%
point elasticity
A measure of elasticity that uses the slope measurement.
We have defined elasticity as the percentage change in quantity demanded divided by the percentage change in price.
point elasticity
(ΔQ / Q1) / (ΔP / P1) = (ΔQ / ΔP) x (P1 / Q1)
note: (ΔQ / ΔP) reciprocal of slope
total revenue (TR)
TR = P × Q
total revenue = price × quantity
When price (P) declines,
quantity demanded (QD) increases. The two factors, P
and QD, move in opposite directions
effects of price changes
on quantity demanded:
P inc –> Qd dec
&
P dec –> Qd inc
effect of price increase on
a product with inelastic demand:
P inc x Qd dec = TR inc
effect of price increase on
a product with elastic demand:
P inc x Qd dec = TR dec
effect of price cut on a product with elastic demand:
P dec x Qd inc = TR inc
effect of price cut on a product with inelastic demand:
P dec x Qd inc = TR dec
the most obvious factor affecting demand elasticity is
the availability of
substitutes.
When an item represents a relatively small part of our total budget,
we tend to
pay little attention to its price.
The Time Dimension
The elasticity of demand in the short run may be very different from the elasticity of demand in the long run. In the longer run, demand is likely to become more elastic, or responsive, simply because households make adjustments over time and producers develop substitute goods.
income elasticity of demand
A measure of the responsiveness of demand to changes in income.
income elasticity of demand =
(% change in quantity demanded) / (% change in income)
cross-price elasticity of demand
A measure of the response of the quantity of one good demanded to a change in the price of another good.
cross- price elasticity of demand =
(% change in quantity in Y demanded) / (% change in price of X)
elasticity of supply =
% change in quantity supplied / % change in price
elasticity of labor supply
A measure of the response of labor supplied to a change in the price of labor.
elasticity of labor supply =
(% change in quantity of labor supplied) / (% change in the wage rate)
