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Flashcards in elasticity Deck (47)
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1
Q

what is price elasticity of demand?

A

measures how sensitive is the quantity demanded to a change in price

Price elasticity of demand = percentage change in quantity/ _demanded percentage change in price _

2
Q

what is inelastic demand?

A

qty demanded is insensitive to a change in price

3
Q

how to calculate the elasticity of demand coefficient?

A

% change in qty / % change in price

4
Q

what is elastic demand?

A

qty demanded is sensitive to a change in price

5
Q

what is the elasticity of demand coefficient = 1?

e.g. 20% decrease/ 20% increase = 1

A

this product has unit elastic demand

6
Q

what kind of elasticity does a vertical line have?

A

perfectly inelastic demand

where % change in qty (0) / % change in price = 0

Price changes have no influence on qty

7
Q

what kind of elasticity does a horizontal line have?

A

product has perfectly elastic demand

firm cannot change the price at all.

Therefore,

% change in qty / % change in price (0) = infinity

8
Q

what are the different kind of elasticities? What are the elasticity coefficients?

A
9
Q

how do you calculate the total revenue?

A

price x qty

10
Q

what test can you use to test elasticity?

A

the total revenue test

11
Q

what can you deduce from the total revenue test?

A
12
Q

what is the elasticity of supply

A

how sensitive is the qty supplied to a change in price

13
Q

what is inelastic supply?

A

qty supplied is insensitive to a change in price

(e.g. electricity in the short run)

14
Q

what is elastic supply?

A

sensitive to changes in price

easy to produce more

15
Q

cross-price elasticity of demand

A

how sensitive the qty of one product is to a change in the price of a different product

these products are either substitutes or complements

16
Q

what can you conclude from cross-elasticity of demand?

A
17
Q

what does income elasticity of demand show?

A

how sensitivity the qty of demand for a product is to a change in income

18
Q

how to calculate income elasticity of demand?

A

% change in qty/ % change in income

19
Q

how does supply impact influence elastic and inelastic demand graphs?

A

High price elasticity of demand: decrease in supply –> small rise in price

Low price elasticity of demand: decrease in supply –> big rise in price

20
Q

why is a large increase in price needed where there is low elasticity of demand when there is a change in supply?

A

when the elasticity is very low, a **large increase in price is needed to get people to reduce their use of a good **and bring the quantity demanded down to the quantity supplied.

21
Q

why is there only a small rise in price in a case where there is_ high elasticity of demand_ when there is a change in supply?

A

when the elasticity is very high, then only a small increase in the price is enough to get people to reduce their use of a certain product and thereby bring the quantity demanded down to the lower quantity supplied.

22
Q

A given shift of the supply curve will have a larger impact on

A

equilibrium quantity (and a smaller impact on equilibrium price) when the elasticity of demand is higher.

23
Q
A
24
Q

What is the arc elasticity of demand?

A
25
Q

apply the arc elasticity of demand

A
26
Q

different types of elasticities and the elasticity of demand coefficients

A
27
Q

how can elasticity affect revenue?

A
28
Q

what does an increase in price and the effect it has on revenue look like?

A
29
Q

when elasticity is greater than 1

when elasticis is less than 1

A
30
Q

what influences price elasticitiy of demand?

A
  1. degree of substitutability (this may be influenced by necessity or luxury)
  2. necessity or luxury
  3. fraction of income
  4. temporary v permanent (discounts will increase price elasticity of demand)
  5. Long-Run versus Short-Run Elasticity
31
Q

describe how the time after the price change can influence the price elasticity of demand?

A

Frequently the price elasticity of demand is low immediately after a price change (people have not adjusted or it may be difficult to break habits (increase in tobacco price)) but then increases after a period of time has passed. (enough time to make adjustments or change habits)

32
Q

Whereas the price elasticity of demand refer to ______,

the income elasticity of demand refers to

A

Whereas the price elasticity of demand refers to movements along the demand curve, the income elasticity of demand refers to shifts in the demand curve caused by changes in income.

33
Q

distinguish between high and low price elasticities of supply

A

A high price elasticity of supply means that firms raise their production by a large amount if the price increases. (qty very responsive to price change)

A low price elasticity of supply means that firms raise their production only a little if the price increases. (qty supplied insensitive to price change)

34
Q

how do you calculate the price elasticity of supply

A
35
Q

what is perfectly elastic supply?

A

the price does not change at all. It is the same regardless of the quantity supplied.

a small increase in price brings forth a huge increase in the quantity supplied by firm

36
Q

what is perfectly inelastic supply?

A

The vertical supply curve is perfectly inelastic; it has zero elasticity.

indicating no response of quantity supplied to a change in price

For example, there is only one Mona Lisa. A higher price cannot bring about a higher quantity supplied

37
Q

describe how different price elasticities of supply will respond to a shift to demand

A

If the price elasticity of supply is high, there will be a small change in price. If the price elasticity of supply is low, there will be a large change in price.

38
Q

luxury goods have

A
39
Q

what are determinants of supply elasticity?

A
  1. ease at which suppliers can increase output i.e. capacity constraints
  2. supply is usually more price sensitive over time
40
Q

when to use the arc elasticity of demand?

A

when there is a large change in price

41
Q

what is another way to express elasticity of demand?

A

slope = m

42
Q

when to use the point elasticity of demand?

A

when there is a small change in price

43
Q

y=mx + b

also is

A

P = mQD + B

44
Q

what happens to revenue

A
45
Q

if elastic

A
46
Q

cross price elasticity of demand

A
47
Q

elasticity

A

Inferior goods < 0

normal goods > 0

  • necessity
  • luxury>1