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Economics Microeconomics > Topic 3: dynamics of markets: price elasticity > Flashcards

Topic 3: dynamics of markets: price elasticity Flashcards

1
Q

What is elasticity?

A

defined as the percentage change in a dependent variable if the relevant independent variable changes by 1%

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2
Q

formula of elasticity

A

By dividing the percentage change in the dependent variable by the percentage change in the independent variable

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3
Q

What does Utility mean?

A

means the amount of satisfaction that someone obtains from consuming an additional unit

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4
Q

Total utility

A

refers to all the satisfaction per unit gained from the consumption of those goods. It can be found by dividing total utility by the number of goods consumed

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5
Q

Average utility

A

is the average satisfaction per unit from the consumption of those goods which can be found by dividing total utility by the number of goods consumed

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6
Q

Marginal utility

A

is the satisfaction gained from the last economic good consumed

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7
Q

What is the law of diminishing marginal utility

A

when the marginal utility declines as the number of goods consumed increases

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8
Q

How is a marginal utility found

A

by subtracting successive total utilities

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9
Q

What is called consumer equilibrium

A

When the marginal utilities of goods purchased by the consumer are equal

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10
Q

How to determine the patterns of consumption

A

by reference to the prices of goods and their relative marginal utilities

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11
Q

What is consumer equilibrium

A

is a state of stability in consumer purchasing patterns n which an individual has maximised his or her total utility

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12
Q

The law of demand

A

states that there is an inverse relationship between a good’s price and the quantity demanded, everything else being the same. If the relative price of a god falls, the individual will buy more of the good. If the relative price rises, the individual will buy less

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13
Q

Wha leads to the law of demand

A

The assumption of rational behaviour, coupled with the consumer’s willingness and ability o substitute less costly goods when the price go up

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14
Q

What does the price elasticity of demand refer to

A

the responsiveness of quantity demanded to a change in price. The word responsiveness means that there is a stimulus reaction involved. Some changes or stimuli cause people to react by changing their behavior. Elasticity measures the extent to which people react

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15
Q

When is demand inelastic

A

When quantity demanded is relatively unresponsive to price changes

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16
Q

When is demand elastic

A

Where quantity demanded is very responsive to price changes- a small change in price leading to a relatively large quantity demanded

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17
Q

what is the elasticity of demand

A

is the relationship between proportionate change in price and the proportionate change in quantity demanded

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18
Q

What is the most common elasticity measurement

A

price elasticity of demand

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19
Q

What does the price of elasticity of demand measure

A

it measures how much consumers respond in their buying decisions to a change in price

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20
Q

How is price elasticity calculated

A

by making use of the percentage change in price and quantity, and not absolute changes

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21
Q

Price elasticity of demand formula

A

percentage change in quantity divided by percentage change in price

22
Q

Degrees for elastic demanded

A

demand tends to be elastic for goods and services that are close substitutes, take up a large portion of consumers income, or are perceived as luxuries and whose purchase can be postponed

23
Q

Degrees of inelastic demanded

A

When a given change in price causes a smaller percentage change in demand, the good has inelstic demand
like basic needs

24
Q

When does unit price elasticity occur

A

when a percentage change in price results in an equal percentage change in demand, in the opposite direction like 10% and 10%

25
Q

Why doesn’t total revenue not change when the price elasticity of demand is unity?

A

it is because a given percentage in price will cause an equal percentage change in demand, leaving total revenue unchanged

26
Q

When does price inelasticity occur

A

when a change in price causes no change in the quantity demanded. For example, a person with a serious illness might be prepared to buy the same quantity of medicine when its price rises ad may not find it beneficial to increase the quantity they take when its price fails

27
Q

What is perfect elasticity

A

When demand is perfectly elastic at a certain price level, demand for the god will be infinite. An increase in price will cause demand to fall to zero. At any price below, the original price the quantity demanded will remain infinite

28
Q

What happens when demand is elastic

A

price and total revenue will move in opposite directions so that a rise in price will cause a fall in total revenue and a fall in price will cause a rise in total revenue

29
Q

What happens when demand is inelastic

A

price and total revenue will move in the same direction meaning a rise in price will cause a rise in revenue and a fall in price will cause a fall in total revenue

30
Q

Why doesn’t total revenue not change when the price elasticity of demand is a utility?

A

a given percentage in price will cause an equal percentage change in demand in the opposite direction, leaving total revenue unchanged

31
Q

Price elasticity of demand along a demand curve

A

Price elasticity of demand along most demand curves becomes more inelastic as price falls

32
Q

The shift in the demand curve

A

A shift in the demand curve will alter the price elasticity of demand at any given price. An increase in demand will make demand more inelastic. At higher levels of demand, people will be less sensitive to price changes

33
Q

What is the price elasticity of supply

A

is a relationship between the proportionate changes in price and the proportionate changes in quantity supplied?

34
Q

When does elastic supply exist

A

when a percentage change in price causes a greater percentage change in supply

35
Q

When does inelastic supply exist

A

when a given percentage change in price causes a smaller percentage change in supply

36
Q

The level of spare capacity in the industry

A

When an industry is operating below full capacity and so there are unemployed resources, supply is elastic

37
Q

The level of employment

A

In a situation of full employment, the supply of most goods and services will be inelastic. Supply may be increased by improved productivity

38
Q

The ability o store the good

A

Supply will be elastic if the good can be stored. If the price rises, drawing on stocks can increase the quantity offered for sale quickly and if the price falls, adding to stocks can reduce supply

39
Q

The supply of manufactured goods

A

to be more elastic as the production process is usually shorter

40
Q

The supply of mining commodities

A

will be equally inelastic It takes a long time to increase the capacity of mines to produce bigger quantities

41
Q

The supply of agricultural goods

A

will be inelastic because the quantity supplied in any one year is governed by the size of the land planted in the sowing

42
Q

What determines the elasticity of demand

A

The availability of substitutes.
The closer to unique a good or service is, the less elastic demand will be because there will be fewer substitutes.
Some gods are habit-forming like alcohol and chocolates.
If it is possible to postpone the purchase of a good
For essential goods such as bread and milk, demand is relatively inelastic, whereas for luxury goods such as vacations and restaurant, the demand is relatively elastic

43
Q

What does the income elasticity of demand measure

A

The responsiveness of consumers to changes in income. It is concerned with the relationship between changes in income and changes in demand

44
Q

Positive income of elasticity

A

Meaning that in most cases income and demand will move in the same direction an increase in income will lead to an increase in quantity demanded and a decrease in income will cause a decrease in demand

45
Q

How do goods have income elastic demand

A

A given increase in income causes a greater change in demand

46
Q

How do goods have income in elastic demand

A

Means that a given increase in income causes a smaller change in demand

47
Q

How do goods have a negative income elastic demand

A

That a given increase in income causes a greater change in demand

48
Q

How do goods have a negative income inelastic demand

A

Means that a given increase in income inelastic demand

49
Q

Cross elasticity of demand formula

A

Percentage change in quantity demanded of Good A divided be percentage change in price of Good B

50
Q

Substitute goods in cross elasticity of demanded

A

Is positive: an increase in the price of B will lead to an increase in demand for A

51
Q

Complementary goods of crops elasticity of demand

A

Will be negative: increase in the price of B will lead to a decrease in demand for A

When two gods are closely related complements. The cross elasticity of demand will have a high negative value

52
Q

Unrelated goods meaning

A

they have 0 cross elasticity of demand. Like the rise of water won’t affect a pair of jeans

A change in the price of one good may affect demand for what appears to be unrelated goods because a change in the price of a goodwill affect the peoples purchasing power

Economics Microeconomics (4 decks)

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