Wk1 - Elasticity Flashcards
What is the Law of Demand
The inverse relationship between P & QD
What is the Law of Supply
As P increases so does QS
What is the Equation for Elasticity
ε = %∆Q ÷ %∆P
ε = ∆Q/Q ÷ ∆P/P
ε = (∆Q÷∆P) * (P÷Q)
If, -b, is the ratio of the fall in quantity to the rise in price, what is the price elasticity of demand.
ε = %∆Q ÷ %∆P
ε = (∆Q ÷ ∆P) * (P÷Q)
ε = -b * (P ÷ Q)
What is Slope vs Elasticity
Slope is the ratio of absolute changes in Q & P
( =∆Q/∆P )
Elasticity is the ratio of percentage changes in Q and P
Find the PED at P=3 if D is represented by: 2Q+P=4
2Q = 4 - P
Q = 2 - P/2
When P=3, Q=1/2
∆Q/∆P = -1/2
Therefore:
(∆Q/∆P)(P/Q) = -(1/2)(3÷1/2) = 3
What is an elastic Demand curve
When a change in price results in a more than proportionate change in QD
Where is the elastic region of the demand curve
at the top
where is unit elasticity on the demand curve
in the middle
Where is the inelastic region of the Demand curve
at the bottom
What happens when PED is >1
Elastic
Change in price leads to a more than proportional change in demand
What happens when PED = 1
Unit Elasticity
Change in price leads to a proportional change in Demand
What happens when PED = -1
Inelastic
Change in price leads to a less than proportional change in Demand
What does a vertical demand curve show
Perfectly inelastic demand
What does a horizontal demand curve show
Perfectly elastic demand
Is the elasticity of demand constant along the demand curve
No
The Elasticity of demand is different at every point along a downward sloping linear demand curve
Yes - the elasticities are constant along horizontal and vertical demand curves
What is the formula for income elasticity
ξ = (%Δ𝑄) / (%Δ𝑌)
= (Δ𝑄/𝑄) / (Δ𝑌/𝑌)
= (Δ𝑄/Δ𝑌) * (𝑌/𝑄)
What is the formula for cross elasticity of demand
Exy = %ΔQX ÷ %ΔPY
Elasticity = percentage change in quantity of X ÷ the percentage change in price of Y
