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Econ > Topic 5: Elasticity and its' applications > Flashcards

Topic 5: Elasticity and its' applications Flashcards

1
Q

What is the price elasticity of demand based on?

A

The law of demand: As prices increase, the quantity demanded decreases

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2
Q

But why do we need to consider the price elasticity of demand?

A

It tells us HOW MUCH the quanitty demanded changes when prices change

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3
Q

Elastic Demand

A

When an increase in price reduces quantity demand by a LOT

When a decrease in price increases quantity demand by a LOT

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4
Q

Inelastic Demand

A

When a increase in price reduce the quantity demanded by a little

When a decrease in price increases the quanitty demanded by a little

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5
Q

What does a Inelastic demand curve look like?

A

The letter I, it is very steep

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5
Q

What does a Inelastic demand curve look like?

A

The letter I, it is very steep

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6
Q

What does an elastic demand curve look like?

A

Very flat, looks more like an E than an I

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7
Q

Define price elasticity of Demand

A

Measure of the responsiveness of the quantity demanded of a good to a change in the price of that good!!!

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8
Q

First Formula for Price elasticity of demand

NOTE

A

1) IEdI= %change in quan demanded/ %change in price

This one has to be in percents!!! IF given 10% change in price dont calc anything

If not given %change in price, y2-y1

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9
Q

What does numerical elasticity mean?

A

Lets say if there is an elasticity of 2, that the change in quantity is twice as large as the change in price!!!!!!!

Lets say if there is an elasticity of 0.5, that the change in quantity is half that of the change in price

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10
Q

Why does elasticity formula 1 not work?

A

Because calculating a->b and b-> give different results!!!! must use midpoint formula

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11
Q

Which formula do we use to calculate the price elasticity of demand?

A

USE THIS :
Midpoint formula= (New-Initial)/(Average) x 100

Use it to calculate both %change in price and quantity, then input it into the original formula

%change in quantity/%change in price

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12
Q

2 KEY THINGS IN MIDPOINT FORMULA

A

1) NEW-INITIAL

2) X 100!!!!!

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13
Q

Perfectly inelastic Demand

Meaning

Example

A

The demand curve is vertical!, |Ed|=0

Quantity demanded does not change even as prices change from 0-100+

Air Water

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14
Q

Elastic Demand

A

|Ed|>1

When the % change in quantity demadned is greater than the % change in price

QUANTITY MOVES MORE THAN PRICE

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15
Q

Inelastic demand

A

|Ed|<1

When the % change in quantity demanded is smaller than the % change in price

Quantity moves less than the price!!!

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16
Q

Unit Elasticity of Demand

A

|Ed|=1

%change in price=%change in quantity demanded

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17
Q

Perfectly Elastic Demand

A

|Ed|=Infinity

At any price increase, quantity demand is zero; At any price reduction infinite quanity demanded

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18
Q

What determines the Price Elasticity Of Demand of a good?

FACTORS THAT INFLUENCE

A
  1. Availability of Clsoe substitutes
  2. Necessity or Luxyry
  3. How defined the market is
  4. Time horizon
  5. Size of purchase relative to consumers budget
19
Q

Availability of close subs influence on elasticity of demand

A

THE MORE SUBS= MORE ELASTICITY
chocolates

THE LESS SUBS= LESS ELEASTICITY
eggs

20
Q

Necessity or Luxury influence on price elasticity of demand

A

Necessity= Less Elasticity bc NEED

Luxury= More elasiticty bc want

21
Q

How defined the market is influence on price elasticity of demand

A

HIGHLY DEFINED MARKET=more subs= HIGH ELASTICITY
cauliflower

Barely defined market=less subs= low elasticity
food

22
Q

Time horizon influence on price elasticity of demand

A

Directly following price incerase= inelastic demand bc cant switch right away

longer time= more elasticity

EX: fuel prices skyrocket, short run inelastic, long run elastic bc switch to better cars

23
Q

relative to Size of consumers budget influence on price elasticity of demand

A

Small size in consumers budget= INELASTIC DEMAND BC it dont make a difference if buy or not

BIG SIZE in consumers budget= ELASTIC DEMAND BC it makes a lot of difference if you buy or not

24
Q

How are price elasticity of demand and total rev related?

A

Ed is about how much quantity demanded is affected with price changes

Total Rev= P x Q so

PRICE ELASTICITY OF DEMAND DIRECTLY DETERMINES THE TOTAL REVENUE AFTER A PRICE CHANGE

25
Q

When prices change what happens

A

Total Revenue also changes!

26
Q

What is total revenue diagram?

A

the square underneath a graph plot point, P X Q

27
Q

When demand is elastic which way does price and total revenue go?

A

OPPOSITE DIRECTIONS!

28
Q

When demand inelastic, which way does price and total revenue go?

A

Same direction

29
Q

When demand is unit elasticity which was does price and revenue go

A

REV ALWAYS STAYS CONSTANT

30
Q

Is the elasticity on the demand curve cosntant like the slope?

A

No it is NOT! Slops is the ratio of change bwtween price and quantity; elasticity is the ratio of percentage changes

31
Q

Explain the elasticity levels on a demand curve?

HOW TO CHECK THIS?

A

Above the midpoint, demand is elastic,

AT MIDPOINT, DEMAND IS UNIT ELASTIC

Below Midpoint, demand is inelastic

Total rev x Elasticity level rules (opposite or same direction)

32
Q

What is cross price elasticity of demand

A

measure of how much the quantity demanded of good A reacts to the price changes of good B!!!!!!

MEASURED B/W SUBS AND COMPS!!

33
Q

Formula for cross price elasticity of demand?

A

%change in quantity demanded of good a/ %change in price of good b

same q/p but DIFF GOODS!

34
Q

RESULTS for cross price elasticity of demand?

A

Positive: SUBSTITUTES
(if price of good a goes up, demanded quantity of good b goes up!!! logic)

Negative= complements
(If price of good a goes up, demanded quantity of good b goes down)

0= unrelated

35
Q

Income elasticty of demand

A

Measure of how much the quqantity demanded of a good responds to changes in income

-normal goods
-inferior goods

36
Q

RESULTS for income elasticity of demand

A

-positive but less than 1 NORMAL & NECESSITY

-positve and greater than 1 NORMAL & LUXURY

-negative INFERIOR

37
Q

Priice Elasticity of Supply

A

How much does quantity supplied respond to a change in price

38
Q

Inelastic supply means that

A

Quantity supplied can only change little with price changes!

39
Q

Elastic supply means that

A

Quantity supplied can change a lot wiht price changes

40
Q

On a slope, where is supply elastic and inelealstic and unit elastic?

IMPORTANTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT

On a slope where is demand inelastic elastic and unit elastic

A

Supply:
Inelastic at the top, Unit Elastic in the centre, Elastic at the bottom

(Elastic at the bottom because there is more capcity for production if needed)

Demand:
Elastic at the Top, Unit Elastic in the centre, Inelastic at the bottom

(Low price, high quantity= inelastic;High price Low Quantity Elastic)

41
Q

What are two factors that influence Elaticity of Supply

A

Longer time period= Elastic
More resources to substitue with= Elastic

42
Q

PS NC on cross price elasticity?

A

Positve number? SUBSTITUTED
Negative number? COMPLEMENTS

43
Q

Why is lower half of demand curve inelastic?

A

bc lower prices= lower part of consumers wallet= inelastic!!!

44
Q

When you are given numbers for % change questions

A

Just use them love dont do any extra math

45
Q

WHAT IS CRITICAL IN ECON VARIABLES?

A

ONLY ONE CAN CHANGE!!!! YOU CANT HAVE MULTIPLE SHIFTINF VARIABLES!

Econ (20 decks)

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