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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

Elasticity: 0
Demand curve is vertical
Quantity demanded does not change when price changes

4

Describe a unit elastic demand

Elasticity: 1
Change in quantity demanded and change in price is the same

5

When is the price elasticity of demand inelastic? elastic?

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

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

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

Percentage change in quantity demanded
/
Percentage change in income

9

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

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)

Percentage change in quantity demanded
/
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

Percentage change in quantity supplied
/
Percentage change in price

13

When is supply perfectly inelastic? perfectly elastic? elastic?

Perfectly inelastic: Supply curve is vertical, elasticity: 0
Unit elastic: Supply curve is linear, passing through origin, elasticity: 1
Perfectly elastic: Supply curve is horizontal, elasticity: infinity