Week 4 - Elasticity Flashcards
What is Price Elasticity of Demand
The percentage change in quantity demanded divided by the percentage change in price
Explain the PED numbers
PED is always negative, because the demand curve is downward sloping:
PED = 0 (perfectly inelastic demand)
PED = infinity (perfectly elastic demand)
PED = 1 (unitary elastic demand)
PED > 1 (relatively elastic demand)
PED < 1 (relatively inelastic demand)
When do you calculate elasticity using the Arc method
When we have 2 discrete price/quantity coordinates
How do you calculate Arc elasticity of demand, for a price quantity change from (Q0, P0) to (Q1, P1)
PEDarc =
𝑄1 − 𝑄0 /
(𝑄1 + 𝑄0 /2) /
𝑃1 − 𝑃0 /
(𝑃1 + 𝑃0) /2
Describe the relationship between a price increase and a firm’s revenue at different points on the demand curve
Elastic (left of unitary) - decrease in total revenue
Inelastic (right of unitary) - increase in total revenue
How do you calculate PED using the starting point
PED = (change in Q/Q) / (change in P/P)
How do you calculate point elasticity of demand
PED = dQD/dP x P/QD
What is elasticity
A measure of the responsiveness of demand (or supply) to a change in other variables
What is Cross-price Elasticity of Demand
The percentage change in quantity demanded for good A divided by the percentage change in price for good B
Explain the XED numbers
Positive XED are substitute goods, negative XED are complement goods:
XED = - infinity (perfectly elastic demand)
XED = -1 (unitary elastic demand)
XED = infinity (perfectly elastic demand)
XED = 1 (unitary elastic demand)
-1 < XED < 0 (weak complements)
- 1 > XED (close complements)
1 > XED > 0 (weak substitutes)
1 < XED (close substitutes)
XED = 0 (perfectly inelastic demand, unrelated goods)
What is Income Elasticity of Demand
The percentage change in quantity demanded divided by the percentage change in Income
Explain the YED numbers
Positive YED are normal goods, negative YED are inferior goods:
YED > 1 (luxury goods)
0 < YED < 1 (necessity goods)
YED < 0 (inferior)
How do you calculate budget share
budget share = QD x P / Y
What is Price Elasticity of Supply
The percentage change in quantity supplied divided by the percentage change in price
Explain the PES numbers
PES is always positive, because the supply curve is upwards sloping:
PES = 0 (perfectly inelastic supply)
PES < 1 (relatively inelastic supply)
PES > 1 (relatively elastic supply)
PES = infinity (perfectly inelastic supply)
