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ECON1010 > Week 3 > Flashcards

Week 3 Flashcards

1
Q

What is ELASTICITY?

A

A measure of how much one economic variable responds to changes in another economic variable

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2
Q

What does the law of demand state?

A

When price increases, demand decreases.

When price decreases, demand increases.

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3
Q

What is the PRICE ELASTICITY OF DEMAND?

A

Responsiveness of the quantity demanded to a change in price.

Measured by dividing % change in quantity demanded by % change in price.

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4
Q

Can PED be determined by the slope of the demand curve?

A

Yes - the slope shows how much quantity demanded changes as price changes.

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5
Q

Why is slope not best measurement to PED?

A

It is sensitive to units chosen for quantity and price (e.g. gram vs kg). Hence, % change is used.

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6
Q

What is formular for PED?

A

% change in QD divided by % change in price

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7
Q

Is PED always negative?

A

Yes, but only the absolute number is considered.

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8
Q

What is ELASTIC DEMAND?

A

When % change in QD > % change in $

PED > 1

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9
Q

What is INELASTIC DEMAND?

A

When % change in QD < % change in $

PED > 1

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10
Q

What happens if QD is sensitive to changes in price?

A

% change in QD > % change in $

PED > 1

ELASTIC

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11
Q

What happens if QD is NOT sensitive to changes in price?

A

% change in QD < % change in $

PED < 1

INELASTIC

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12
Q

What happens if changes in QD = changes in $?

A

PED = 1

UNIT ELASTIC

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13
Q

What is UNIT ELASTIC?

A

When % change in QD = % change in price

PED = 1

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14
Q

What is the MID-POINT FORMULA?

A

Used to calculate PED

Ensures only have one value for PED btw two points on demand curve

It uses:

  • average of inital and final quantity
  • average of inital and final price
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15
Q

What is the MID-POINT FORMULA?

A

PED = (Q2-Q1)/((Q1+Q2)/2) / (P2-P1)/((P1+P2)/2)

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16
Q

What does a flatter demand curve indicate?

A

A product is more elastic

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17
Q

What does a steeper demand curve indicate?

A

A product is more inelastic

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18
Q

What is perfectly inelastic demand?

A

When a change in $ results in no change in QD

QD is not responsive to $ change

Demand curve is VERTICAL

PED=0

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19
Q

What is perfectly elastic demand?

A

When a change in $ results in an infinite change in QD

QD is indefinitely responsive to $ change

Demand curve is HORIZANTAL

PED=INFINITY

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20
Q

Elastic or inelastic, PED < 1?

A

Elastic

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21
Q

Elastic or inelastic, PED > 1?

A

Inelastic

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22
Q

If PED = 1, what is elascity?

A

Unit elasticity

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23
Q

If PED = 0, what is elascity?

A

Perfectly inelastic

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24
Q

If PED = infinity, what is elascity?

A

Perfectly elastic

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25
Q

What are the key determinants of PED?

A
  • availability of substitutes
  • time
  • luxury vs necessity
  • type of market
  • share of consumers’ budget
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26
Q

Why is availability of substitutes an determinant of PED?

A

Because how consumers react to $ changes depends on alternatives

e.g. petrol $ - consumers have few alternatives

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27
Q

Elasticity if a product has more close substitutes?

A

More elastic

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28
Q

Elasticity if a product has few close substitutes?

A

Less elastic

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29
Q

Why is passage of time an determinant of PED?

A

Because it takes time for consumers to adjust their buying habits when $ change

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30
Q

Elasticity if more times passes?

A

More elastic

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31
Q

Elasticity if less times passes?

A

Less elastic

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32
Q

Elasticity if a product is a luxury?

A

More elastic

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33
Q

Elasticity if a product is a necessity?

A

Less elastic

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34
Q

Elasticity if a narrowly defined market?

A

More elastic

Because consumers have more alternatives

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35
Q

Elasticity if a broadly defined market?

A

Less elastic

Because consumers have fewer alternatives

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36
Q

Why is share of consumer budget/spend?

A

Because low-segment priced products take less share of consumers’ budget/income

Increase in $ therefore negligible impact on a consumer budget

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37
Q

Elasticity if a small % of consumer budget?

A

Less elastic

38
Q

Elasticity if a larger % of consumer budget?

A

More elastic

39
Q

Total Revenue - what is it?

A

The total amount received by a seller of a good/service

40
Q

What is the formula for total revenue?

A

Unit price x quantity supplied

41
Q

When demand is inelastic, what direction do price and revenue move in?

A

Same direction.

Price Increase, Total Revenue Increase
Price Decrease, Total Revenue Decrease

42
Q

When demand is elastic, what direction do price and revenue move in?

A

Opposite directions.

Price Increase, Total Revenue Decrease
Price Decrease, Total Revenue Increase

43
Q

Why does revenue decrease when demand is inelastic and price falls?

A

Because

- revenue lost from price decrease greater than revenue gained from increase in QD

44
Q

Why does revenue decrease when demand is elastic and price falls?

A

Because

- revenue lost from price decrease less than revenue gained from increase in QD

45
Q

What happens to revenue when product is unit elastic?

A

Change in $ is exactly offset by a proportional change in QD.

Revenue is not affected.

46
Q

What is competitive market?

A

a market with many buyers and sellers

47
Q

Does a competitive market result in economic efficiency? Why?

A

Yes

Because:

  1. MB = MC
  2. the sum of the consumer surplus and producer surplus are at maximum
48
Q

What is necessary for economic efficiency?

A

MB of last unit sold = MC of production

Occurs at Competitive Equilibrum

49
Q

What is Economic Surplus?

A

The sum of consumer surplus and producer surplus

50
Q

What is consumer surplus?

A

area below demand curve, above equilibrum $

51
Q

What is producer surplus?

A

area above the curve, below equilibrum $

52
Q

What is deadweight loss?

A

the reduction in economic surplus resulting from market not being in competitve equilibrium

53
Q

What is consumer surplus?

A

Measures NET BENEFIT to consumers from buying a particular product

54
Q

What is producer surplus?

A

Measures NET BENEFIT to firms from supplying a particular product

55
Q

What is economic surplus?

A

the sum of the net benefit to society from the production of particular goods/services

56
Q

What is economic efficiency of a competitive market?

A

Equilibrium in a competitive market result in the greatest amount of economic surplus, or the total benefit to society, from the production of good/service

57
Q

What reduces economic efficiency?

A

Anything that causes the market for a good/service not to be in competitive equilibrium reduces total benefit to society

58
Q

What is economic efficiency?

A

a market outcome in which

1) the MB = MC
2) the sum of the consumer surplus and producer surplus are at maximum

59
Q

How can taxes affect a product’s market equilibrium?

A

Because can reduce economic efficiency

60
Q

What is the true burden of tax?

A
  1. the amount consumers/firms pay to the Gov

2. the deadweight loss

61
Q

What is EXCESS BURDEN?

A

deadweight loss from tax

62
Q

When is a tax-efficient?

A

When it imposes a small excess burden relative to tax revenue raised

63
Q

What is tax incidence?

A

The division of tax burden btw

  • buyers, and
  • sellers
64
Q

What is Elasticity?

A

a measure of how much one economic variable responds to changes in another e/variable

65
Q

What is Price Elasticity of Demand?

A

the responsiveness of QD to change in $

66
Q

What is formula for Price Elasticity of Demand?

A

PED = % change in QD / % change in $

67
Q

What is Unit Elastic Demand?

A

PED = 1

When the % change in QD = % change in price

68
Q

What is Elastic Demand?

A

PED > 1

When the % change in QD > % change in price

69
Q

What is Inelastic Demand?

A

PED < 1

When the % change in QD < % change in price

70
Q

What is Perfectly Elastic Demand?

A

PED = Infinity

when change in $ results in INFINITE CHANGE in QD

71
Q

What is Perfectly Inelastic Demand?

A

PED = O

when change in $ results in NO CHANGE in QD

72
Q

What are the determinates of demand?

A
  • subsitutes
  • timeframe
  • income share
  • luxury v. necessity
  • breadth of market
73
Q

If there are MORE substitutes, then elasticity is…

A

MORE ELASTIC

74
Q

If there are timeframe is LONGER, then elasticity is…

A

MORE ELASTIC

75
Q

If there are price takes GREATER SHARE of consumer income, then elasticity is…

A

MORE ELASTIC

76
Q

If there the product is MORE LUXURY , then elasticity is…

A

MORE ELASTIC

77
Q

If there the MARKET IS NARROWER substitutes, then elasticity is…

A

MORE ELASTIC

78
Q

What is total revenue?

A

total amount received by sellers of goods/services

79
Q

What is formula for total revenue?

A

TR = Price x Quantity

80
Q

What is the TOTAL REVENUE TEST?

A

a method of estimating the price of elasticity of demand by observing the change in TR resulting from price change

81
Q

If Inelastic and price increases,

A

TR increases

82
Q

If Inelastic and price decreases,

A

TR decreases

83
Q

If Elastic and price increases,

A

TR decreases

84
Q

If Elastic and price decreases,

A

TR increases

85
Q

If Unit Elastic and price changes,

A

TR is not affected

86
Q

If Elastic and price changes, TR moves in the ____ direction

A

Opposite

87
Q

If Elastic and price changes, TR moves in the ____ direction

A

Same

88
Q

If Unit Elastic and price changes, TR moves in the ____ direction

A

No - it is unaffected

89
Q

What is consumer surplus?

A

benefit/value for consumers above $ paid

90
Q

What is producer surplus?

A

how much more producers are getting relative to their opportunity cost

ECON1010 (5 decks)

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