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ECON1101 Mid Sem > Topic 3: Price Elasticity of Demand > Flashcards

Topic 3: Price Elasticity of Demand Flashcards

1
Q

what is price elasticity of demand

A

measure of the responsiveness of quantity demanded to changes in price

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2
Q

explain when demand is elastic

A
  • Elastic when % change in quantity demanded is greater than the % change in price
  • Quantity demanded highly responsive to change in price
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3
Q

explain when demand is inelastic

A
  • Inelastic when the % change in quantity demanded is less than the % change in price
  • Quantity demanded relatively unresponsive to changes in price
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4
Q

explain when demand is unit elastic

A
  • Unit elastic when the % change in quantity demanded= % change in price
  • Quantity demanded responds proportionately to changes in price
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5
Q

numerically, when is demand elastic, inelastic or unit

A 
elastic= greater than 1
inelastic= less than 1 
unit= equals one
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6
Q

how does availability of close substitutes make a good elastic?

A
  • More close substitutes= more people will switch to cheaper products
  • More similar products > more elastic
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7
Q

how does time make a good elastic?

A
  • More time passes= opportunity to find alternatives

- Example: moving towards electric cars when petrol price increase

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8
Q

how does time make a necessity v luxury elastic

A
  • Necessities= inelastic, while luxuries= elastic (can do without // more responsive)
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9
Q

how does time make a good elastic

A
  • Narrowly defined market= more elastic, broadly defined= more inelastic
  • Example: demand for food inelastic, demand for ice cream elastic
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10
Q

what depends how you calculate ED

A

whether you’re given percentage change or actual change

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11
Q

how do you calculate ED from percentages

A

point method (basic equation)

  • percentage change in QD/ percentage change in P
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12
Q

how do you calculate ED from actual change

A

mid point method

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13
Q

formula for mid point

A

Q2−Q1 × P2+P1

P2 - P1 Q2 + Q1

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14
Q

explain when a good is perfectly elastic

A

ed= infinite

  • horizontal curve
  • • If price increases even slightly above its current equilibrium, the Qd will fall to zero
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15
Q

explain when a good is perfectly inelastic

A
  • Demand curve is vertical

* The same quantity of the good will be demanded regardless of what the price is (%change Qd= 0)

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16
Q

formula for revenue

A

TR= PRICE X QUANTITY

17
Q

In elastic goods, what happens to Q and therefor TR when P is increased

A

large decrease in Q

= decrease TR

18
Q

In elastic goods, what happens to Q and therefor TR when P is decreased

A

large increase in Q

= Increase TR

19
Q

In INelastic goods, what happens to Q and therefor TR when P is increased

A

small decrease in Q

= increase TR

20
Q

In INelastic goods, what happens to Q and therefor TR when P is decreased

A

small increase in Q

= decrease TR

21
Q

when drawing curve is elastic or inelastic flatter

A

o Elastic: flatter curve

o Inelastic: steeper curve

22
Q

how is income elastitict of demand denoted

A

E i

23
Q

how is cross elasticity of demand denoted

A

Ex

24
Q

how is price elasticity of supply denoted

A

Es

25
Q

what is income elasticity of demand + formula

A
  • Responsiveness of change in quantity to change in income

%cahgne in Qd/ %change in income

26
Q

are normal goods and inferior positive income elasticise or negative

A

o Normal goods: higher income raises quantity demanded
♣ Qd and income move in same direction= positive income elasticises
o Inferior goods: higher income lowers quantity demanded
♣ Qd and income move opposite directions= negative income elasticities

27
Q

among normal goods, what is the variation in elasticity size

A

o Necessities= small income elasticities (consumers always buy)
o Luxuries= large income elasticities (consumers can do without if income low)

28
Q

what is cross price elasticity + formula

A
  • Responsiveness from change in price of one good, on demand for another good
    %cahgne in Qd of 1 good/ %change in price of 2nd good
29
Q

if the cross price elasticity is postive=

A

o Positive Ex: substitutes

♣ Price of one good moves in same direction as quantity of other good

30
Q

if the cross price elasticity is negative=

A

o Negative Ex: complements

♣ Price of one good moves opposite direction as quantity of other good

31
Q

is elasticity of supply calculated the same as demand

A

yes, either basic formula or mid point

32
Q

if an elastic good falls or rises in price, what is the impact on expenditure

A

o Fall in price= increase in expenditure

o Increase in price= expenditure decreases

33
Q

if an inelastic good falls or rises in price, what is the impact on expenditure

A

o Fall in price= decrease in expenditure

o Increase in price= total expenditure increases

ECON1101 Mid Sem (13 decks)

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