Unit 1 - Elasticity Flashcards
price elasticity of demand
% change in Qd/% change in P
Why is elasticity always negative?
% change in Qd is the opp. sign (-) of % change in P: Elasticity -
elasticity of demand
how revenues change when a change in P –> change in Qd
revenues
P x Q ($ directed by firm from selling its good)
perfectly inelastic D curve
no effect of price increase on Q, revenues increase (big), # range (0)
insensitive to price *essential goods (i.e. meds)
fully vertical line
inelastic D curve
able to reduce D a little
small effect of price increase on Q
revenues increase (medium)
range: 0 to -1
negative sloping curve
unitary elastic D curve
P increase causes a medium decrease in Q
revenues: no change
range: -1
elastic D curve
P increase causes a large decrease in Q
revenues decrease
range: < -1
perfectly elastic D curve
P increase causes Q to go to 0
revenues goes to 0
range: infinity
fully horizontal graph
revenue
P+Q
elastic determinants
luxury, substitute, big % of income, long run
inelastic determinants
necessity, no/few substitutes, small % of income (i.e. toothpaste), short run
price elasticity of demand
% change in Qd/% change in P
perfectly elastic
elasticity = 0 (Q = no change), perfectly vertical graph
inelastic
between 0 and -1 (i.e. -0.5), negative slope
elastic
less than -1 (i.e. -3), relatively steeper negative slope
elasticity of supply
% change in Qs/% change in P
positive #
perfectly inelastic
no change in Qs when P increases, # range: 0, fully vertical
inelastic
small increase in Qs, 0 to 1 # range
unitary elastic
medium increase in Qs, # range: 1
elastic
large increase in Qs due to P increase, # range: >1
perfectly elastic
P increase causes Qs change to infinity, nearly horizontal
determinants of inealsticity
time frame, substitutes in production
time frame
at market (price increases)
short run: period of time when some input (factor of production) is at equilibrium
income elasticity of demand
% change in Qd/% change in income
income elasticity of demand for inferior goods
-/+
<0 (i.e. bus tokens)
income elasticity of normal goods
+/+ (most goods)
also includes necessity and luxury goods
income elasticity of necessity
<1 (double income –> doubling Qd)
cross-price elasticity of demand
% change in Qd of good A/% change in Qd of good B
substitutes in consumption’s cross-price elasticity
i.e. cars (Good B) & bikes (good A)
increase P of good B, decrease Qd of cars, increase Qd of bikes
consumer surplus (CS)
distance between consumers’ max willingness to pay - market price. measures gains from trade
how to read a CS graph?
willingness to pay read off D curve
producer surplus (PS)
market price - minimum price
producer would accept
measures gains from trade
not the same as profit
market price
producer indifferent about producing this unit (no extra supplies)
price ceiling
max P set by government
non-binding ceiling
set it too high to affect market
other non-market price effects
D for substitutes increases (b/c shortage)
lines
black market sales (get higher prices)
decrease in product quality
increase/decrease D for complements
who wins/loses with price controls?
producers worse off, depends for consumers
price floor
minimum P set by gov’t
can be binding or non-binding (does not equate to effect on market)
other non-market effects
increase D substitutes/complements in consumption
black market sales (at lower prices)
Deadweight loss
higher social surplus at Qeqm than Qqlow is lost gains from trade
higher social surplus at Qeqm than Qhigh reflects waste of resources
