Topic 4: Elasticity Flashcards
The responsiveness (or sensitivity) of consumers and producers to price and income changes.
Elasticity
Value: Elastic
> 1 or Δx > Δy
Value: Inelastic
1 < or Δx < Δy
Value: Unit elastic
= 1 or Δx = Δy
Value: Perfectly elastic
Infinity or Δy will have an infinite effect on Δx
Value: Perfectly inelastic
0 or Δy will have no effect on Δx
Elasticity: > 1 or Δx > Δy
Elastic
Elasticity: 1 < or Δx < Δy
Inelastic
Elasticity: = 1 or Δx = Δy
Unit elastic
Elasticity: Infinity or Δy will have an infinite effect on Δx
Perfectly elastic
Elasticity: 0 or Δy will have no effect on Δx
Perfectly inelastic
It tells us the degree of responsiveness of consumers to a price change of the commodity.
Price Elasticity of Demand (Ed)
Price Elasticity of Demand (Ed) Equation
Ed= ΔQd/ Average of Qd ÷ ΔP/ Average of P
Determinants of Price Elasticity of Demand
- The importance or degree of necessity of the goods or services.
- Number of available substitutes for goods and services
- Proportion of income in price changes
- Time period. The longer the time period, the more elastic or inelastic the demand will be. Consumers have the time to adjust.
Determinants of Price Elasticity of Demand: Essential (Elastic or Inelastic)
Inelastic
Determinants of Price Elasticity of Demand: Not so Essential (Elastic or Inelastic)
Elastic
Determinants of Price Elasticity of Demand: Less or no substitutes (Elastic or Inelastic)
Inelastic
Determinants of Price Elasticity of Demand: Huge number of substitutes (Elastic or Inelastic)
Elastic
Determinants of Price Elasticity of Demand: Change in price of product that has no effect on income or budget (Elastic or Inelastic)
Inelastic
Determinants of Price Elasticity of Demand: With effect on income or budget (Elastic or Inelastic)
Elastic
It indicates the responsiveness of producers’ supply following a change in the price of the product
Price Elasticity of Supply (Es)
Price Elasticity of Supply (Es) Equation
Es= ΔQs/ Average of Qs ÷ ΔP/ Average of P
Price Elasticity of Supply
ES < 1 (Supply is inelastic)
ES > 1 (Supply is elastic)
ES = 1 (Supply is unit elastic)
It is the degree of responsiveness of consumers to a price change of another commodity. Reaction of Consumers to Qd of product x when price of prod y changes.
Cross Price Elasticity of Demand (Exy)
Cross Price Elasticity of Demand (Exy) Equation
Exy= ΔQdx/ Average of Qdx ÷ ΔPy/ Average of Py
If EXY is positive, goods X and Y are _____________ , i.e., sales of good X move in the same direction as the change in the price of good Y.
Substitute Goods
Price of Iphone decreases — Qd of Samsung less; ________
Positive Substitute Goods
When EXY is negative, the two goods are _____________, i.e., an increase in the price of good Y decreases the demand for good X.
Complementary Goods
Price of gasoline increases —- Qd of cars less; _______________
Negative Complementary Goods
A near zero or zero coefficient of EXY would tell us that goods X and Y are _______________, i.e., an increase in the price of good Y will have no effect on the demand for good X.
Unrelated or independent goods
Price of pandesal increases —Qd of household tools; ________________
Zero No Relation
The degree to which buyers respond to a change, in their incomes. Qd changes when Income changes.
Income Elasticity of Demand (consumers)
Income Elasticity of Demand (consumers) Equation
Ei= ΔQd/ Average of Qd ÷ ΔI/ Average of I
EI is positive when the good is a __________ such that more of the good is demanded when income increases- and -vice versa.
Normal good
_________ if the computed EI is more than 1
Luxury
_________ if the computed EI is less than than 1
Necessity
A negative income elasticity of demand suggests that the good is an _____________, i.e., demand for the good decreases as income increases
Inferior good
Second-hand clothes maybe considered as __________ while newly-made shoes may be considered as _____________.
- Inferior Goods
- Normal Goods
Income Elasticity: Normal Goods
Positive elasticity > 0 = 1.89
Income Elasticity: Inferior Goods
Negative elasticity < 0 =
-1.89
Income Elasticity: Normal, Luxury
Positive elasticity > 1 = 1.89
Income Elasticity: Normal, necessity good
Positive elasticity < 1 = 0.89
Type of Goods: Positive elasticity > 0 = 1.89
Normal goods
Type of Goods: Negative elasticity < 0 =
-1.89
Inferior goods
Type of Goods: Positive elasticity > 1 = 1.89
Normal, luxury goods
Type of Goods: Positive elasticity < 1 = 0.89
Normal, necessity good
