Week 8 - Surplus and Elasticity Flashcards
What is economic welfare?
It is the benefits gained from the allocation of resources.
It is measured through consumer and producer surplus.
CS + PS are maximised at the market equilibrium
What is consumer surplus?
It is the difference between the total amount that consumers are willing and able to pay and the total amount they actually pay.
What is producer surplus?
It is the difference between the price the producers are willing and able to supply a product for and the price they actually receive.
What does the term Deadweight loss (DWL) mean?
When the government imposes either a price floor or ceiling price, it can reduce the quantity traded in the market. Resulting in a loss of economic welfare (i.e. loss of consumer and/or producer surplus).
What is elasticity of demand?
How much will the quantity demanded change as a result of a price increase or decrease.
What is elasticity?
It is a measure of hum much one economic variable responds to a change in an other economic variable.
What makes a product inelastic?
It is were consumers will continue to buy it even after a change in the price.
What makes a product elastic?
It is when the product is either unnecessary or can be easily replaced with a substitute.
What is the “price elasticity of demand”? What is the formula?
How much the quantity demanded responds to a price change.
% change in quantity / % change in price.
Describe what is meant by unit elasticity?
The product is not that responsive to a change in price.
Example - price increase of 1% and quantity falls by 1% - therefore total revenue remains the same.
Describe what is meant by relatively elastic?
Product is responsive to the change in price.
Example - Price increase of 1% and the quantity falls by more than 1% - therefore total revenue is less.
Describe what is meant by relatively inelastic?
Product is unresponsive to the change in price.
Example - Price increase by 1%, but quantity decreases by less than 1%
What are the measurements of elasticity?
> 1 (greater than 1) - relatively elastic
<1 (less than 1) - relatively inelastic
= 1 (equal 1) - unit elastic
Determinants of a products elasticity?
- Substitutes available. (High elasticity)
- Higher share of consumer spending (higher the elasticity)
- Goods with a derived demand (i.e. petrol) (less price elastic)
- Long-run elasticity higher than short-run (i.e. petrol)(long-run elasticity greater than short-run)
What is cross-price elasticity? The formula and measurements?
Measures the quantity of demand for one product when the price for another product changes
% change in quantity of good / % change in price of ANOTHER good.
If elasticity of demand (e) is greater than 0 = then the goods are substitutes
If elasticity of demand (e) is less than 0 = then the goods are complements
What is income elasticity. The formula and measurements?
Measure the quantity demanded for a good with changes in consumer income.
% change in quantity / % change in income
e is greater than 1 = good is a luxury
e is less than 1 but greater than 0 = good is a necessity
e is less than 0 = considered an inferior good
What happens to income and quantity if a good is deemed to be a luxury?
elasticity of demand (e) will be greater than 1. With a rise in % of income, than the quantity demanded will increase.
But if % of income falls, quantity demand will also fall.
What happens to income and quantity if a good is deemed to be inferior?
elasticity of demand (e) will be less than 0. With a rise in % of income, than the quantity demanded will fall.
But if % of income falls, quantity demand will also rise.
What happens to income and quantity if a good is deemed to be a necessity?
elasticity of demand (e) will be greater than 0, but less than 1. Quantity demanded will remain relatively the same % as the income rise or fall.
What will happen to price and quantity, for cross-price elasticity, for a complement good?
If price of good 1 rises, we would expect the quantity demanded of good 1 to fall; if the quantity of good 2 falls as well then the two goods “go together”.
What will happen to price and quantity, for cross-price elasticity, for a substitute good?
If price of good 1 rises, we would expect the quantity demanded of good 1 to fall; if the quantity of good 2 rises at the same time then people have moved towards 2 in the face of the higher price of good 1.
