Slide 5 Flashcards
what is price elasticity of demand
the elasticity is the responsiveness of the quantity demanded of a good to a change in its price.
all other influences on buying plans remain the same
what is the equation of price elasticity of demand
delta Q / delta P * avg(P) / avg (Q)
or
percentage change in quantity demanded / percentage change in price
is the price elasticity of demand the same as slope?
no it is not the same as slope. slope is
change in quantity demanded / change in price
true or false: the price elasticity of demand can be negative
true, but we only care about magnitude to highlight elasticity, sign does not matter.
it will always be negative because a positive change in price is always a decrease in demand
what does it mean for a good to have perfectly inelastic demand.
what does the graph look like.
give an example of something that would
if the quantity demanded does not change when the price changes
the demand curve would be a vertical line
Examples
- water
- medicine
what does it mean for a good to have unit elastic demand
it means the percentage change in
the quantity equals the percentage change in price
which means that
the price elasticity of demand = 1
what does it mean for a good to have a perfectly elastic demand
what does the graph look like
what can you infer based off how far the demand curve spans
it will be perfectly elastic if there is an infinitely large demand change when the price barely changes
it looks like a horizontal line when graphed. the graph implies that when the price is X there is an infinite demand and if it deviates from X there is no demand
narrow demand curves implies that the market is more elastic. because there is quicker change for less of a price difference. Vice versa logic for larger spans
define elastic and inelastic and how they differ
if the change is quantity is less than the change in price, we have a price elasticity of demand with a value < 1
if the value is less than 1, we have a inelastic demand
if the change is quantity is more than the change in price, we have a price elasticity of demand with a value > 1
if the value is greater than 1, we have a elastic demand
what are the three factors that can influence the elasticity of demand
- the closeness of substitutes
- the proportion of income spent on the good
- the time elapsed since a price change
true or false: the elasticity of a demand changes along a demand curve
true
how does the elasticity change along a linear demand curve
at the top of the demand curve it is elastic because ε > 1
at the midpoint of the curve it is unit elastic because ε = 1
and at the lower half it is inelastic because ε < 1
what is total revenue
the cost of the good * the amount of goods sold
does an increase in price always result in an increase in total revenue?
no
describe what happens to total revenue if we have an elastic, inelastic and unit elastic demand
If demand is elastic, a price cut increases the quantity sold and total revenue increases
If demand is inelastic, a price cut increases the quantity sold and total revenue decreases
If demand is unit elastic, a price cut increases the quantity sold and total revenue stays the same
what is the total revenue test
it is a method of estimating the price elasticity of demand by looking at how total revenue changes with the change in price
if price cuts and TR increases, elastic
if price cuts and TR decreases, inelastic
if price cuts and TR is same, unit elastic
what shape does the graph take when we draw the relationship between total revenue and quantity demanded
parabola
true or false: elasticity applies to supply
true
what does the elasticity of supply measure
it measures how responsive the quantity supplied is in response to price changes if all other factors of supplying stays the same
what is the equation for the elasticity of supply
delta Q / delta P * avg(P) / avg (Q)
or
percentage change in quantity supplied/ percentage change in price
in a supply graph what does it mean to be
1. perfectly inelastic, describe the graph
2. unit elastic, describe the graph
3. perfectly elastic, describe the graph
- supply does not change regardless of price change, graph is a vertical line
- supply will differ based on price, supply curve is linear and passes through the origin
- supply is infinite at a specific price, graph is a horizontal line
What are the two factors that influence the elasticity of supply
- resource substitution possibilities: if i can easily replace the raw materials i need or not, if i can substitute, i am more elastic
- time frame for supply decisions
more time to substitute means i am more elastic because i have the time i need to change production process
what is cross elasticity of demand.
what is the equation
it measures how the demand for a good will change if the price of a substitute or compliment good changes, while other things remain the same
eqn: % change in quantity demanded / % change in price of substitute or compliment
or
(delta Q / Q) / (delta P / P)
if there is a price increase for a substitute/complement (cross elasticity) what is the effect on the good
substitute: positive
complement: negative
what is income elasticity of demand
what is the equation
it measures how demand changes in response to a change in income, while all other things remain the same
eqn: % change in quantity demanded / % change in income
income elasticity of demand can be
1. greater than 1
2. between 0 and 1
3. less than 0
what is the outcome of these income elasticity of demand
- demand is income elastic and it is a normal good
- demand is income inelastic and it is a normal good
- the good is an inferior good
when an item is taxes, what are the possibilities on the price of the good
price might rise by the full amount of tax (consumer burden)
price might rise by a partial amount of tax (split burden)
price might not change (producer burden)
draw graphs that highlights who bares the tax burden in a inelastic/elastic supply/demand,
see slide deck
true or false: there is more tax revenue in an inelastic demands
true, gov’t prefer taxing inelastic demands
true or false: taxation will result in deadweight loss
true, because taxation pushes us away from the equalibrium
