Flashcards in 4: Elasticity Deck (13)

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1

## What is price elasticity of demand?

### The measure of responsiveness of the quantity demanded of a good to a change in its price (unit free)

2

## Formula for price elasticity of demand

###
Percentage change in quantity demanded

/

Percentage change in price

(Q2-Q1/Qaverage)*100%

/

(P2-P1/Paverage)*100%

Ignore any minus signs

3

## Describe a perfectly inelastic demand

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Elasticity: 0

Demand curve is vertical

Quantity demanded does not change when price changes

4

## Describe a unit elastic demand

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Elasticity: 1

Change in quantity demanded and change in price is the same

5

## When is the price elasticity of demand inelastic? elastic?

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Inelastic: Numerator smaller than denominator; less than 1, demand doesn't change much when price fluctuates

Elastic: Numerator bigger than denominator; greater than 1, demand changes a lot when price fluctuates

6

## Describe a perfectly elastic demand

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Elasticity: Infinite

If the price changes even a little bit, demand goes to 0

7

## How can you change price to manipulate total revenue? (depending on the demand elasticity) 7

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Elastic: Decrease price to increase total revenue

Inelastic: Increase price to increase total revenue

Unit elastic: Price increase or decrease doesn't change total revenue

8

## Formula for income elasticity of demand

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Percentage change in quantity demanded

/

Percentage change in income

9

## How can you identify normal and inferior goods with income elasticity?

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Normal good: Income elasticity is greater than 1 (income elastic) or between 0 and 1 (income inelastic)

Inferior good: Income elasticity is less than 0 (negative)

10

## Formula for cross elasticity of demand (substitutes & complement)

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Percentage change in quantity demanded

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Percentage change in price of substitute or complement

Substitute: Cross elasticity is positive

Complement: Cross elasticity is negative

11

## What is elasticity of supply?

### The responsiveness of the quantity supplied of a good to a change in its price

12

## Formula for elasticity of supply

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Percentage change in quantity supplied

/

Percentage change in price

13