Unit 3 Elasticity Flashcards
What is the price elasticity of demand?
% change in quantity demanded/ % change in price
Units-free measure of the responsiveness of the quantity demanded of a good to a change in its price (all other things stay the same)
Why is the elasticity of demand almost always negative?
Demand will decrease when price increases and demand will increase when price decreases. (since demand and price have an inverse relationship).
When is something elastic, inelastic, or perfectly elastic.. etc.? (QD..)
Inelastic: QD smaller than % change in price (less than 1)
Elastic: QD greater than % change in price (greater than 1)
Perfectly elastic: QD is infinitely large when price barely changes (infinite and horizontal)
Perfectly inelastic: 0 (vertical line)
Unit elastic: -1 (sloped)
What does elasticity of demand depend on?
1) Closeness of substitutes = closer, more elastic
2) Proportion of income spent = greater, more elastic
3) Time elapsed since price changed = more time, more elastic
Are necessities and luxuries inelastic or elastic?
Necessities are inelastic and luxuries are elastic
How price increases affect total revenue impact how elastic demand is:
If a price increase:
Ups TR = inelastic
Lowers TR = elastic
Unchanged TR = unit elastic
What is the equation for income elasticity?
% change in quantity demanded / % change in income
What is the equation for cross elasticity of demand? Is the CE of a sub/comp + or -?
% change in quantity demanded / % change in the price of good Y
CE of a substitute = +
CE of a compliment = -
What is the elasticity of supply equation?
% change in quantity supplied / % change in price
What sign will the price elasticity of supply be?
Always positive due to the law of supply
Explain how elasticity of supply looks in terms of perfectly inelastic, perfectly elastic, and unit elastic:
Perfectly inelastic = vertical line, equals 0
Perfectly elastic = horizontal line, infinite
Unit elastic = linear passing through origin equals 1
Time frames of elasticity of supply and their effects:
Momentary = perfectly inelastic: quantity supplied immediately following a price change is constant
Short-run = somewhat elastic: some time to adjust to price change
Long run = most elastic: enough time to adjust to price change (infinitely)
Elasticity and consumer surplus:
Perfectly elastic = 0
Perfectly inelastic = Infinite
Consumer’s surplus is large when demand is inelastic and small when it is elastic
Elasticity and producer surplus:
When supply is elastic, producers can increase production without much price or cost change. When supply is inelastic, producers cannot change production easily
