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Flashcards in Elasticity Deck (24)
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1
Q

What must the midpoint value be to be elastic?

A

Greater than 1

2
Q

What must the midpoint value be to be inelastic?

A

Less than 1

3
Q

What must the midpoint value be to be unitary?

A

1 (45°/directly proportionate)

4
Q

How is elasticity of demand measured?

A

Ed = quantity change/average x price average/change

5
Q

Factors affecting price elasticity of demand

A

Substitute availability, luxuries over necessities, time, proportion of income spent

6
Q

How does substitute availability affect elasticity?

A

The greater number of substitutes, the greater the elasticity

7
Q

Who benefits from price inelasticity?

A

Producers and government (if taxed)

8
Q

Who benefits from price elasticity?

A

Consumers

9
Q

What makes a product price elastic?

A

Demand highly sensitive to small price changes

10
Q

What are the three ways of measuring elasticity?

A

Midpoint method, total revenue, income elasticity

11
Q

Midpoint method

A

Qd change/Q average x P average/P change

12
Q

Total revenue

A

TR = PxQ

Direct relationship is inelastic, inverse relationship is elastic

13
Q

Income elasticity

A

Ey = % Q change/% Y change

14
Q

Price Elasticity of Demand

A

Responsiveness of quantity demanded to a change in price

15
Q

Inferior good income elasticity

A

Negative, less than 0

16
Q

Normal good income elasticity

A

Positive, greater than 1

17
Q

How does availability of substitutes affect PED?

A

Easy to switch if price changes, options

18
Q

How does the necessity or luxury status of a good affect PED?

A

If we need it the price is inelastic, if it’s a luxury the price is elastic, addictions considered necessities by users → price inelastic

19
Q

How does proportion of income spent affect PED?

A

Expensive goods are elastic due to using high proportion of consumer’s income, e.g. 50% increase is greater for $1000 TV than $1 chocolate bar

20
Q

How does time affect PED?

A

Time to respond to price change is elastic, demand for commodities is inelastic because consumers don’t have time to adjust their consumption/find subs

21
Q

Price elasticity of supply

A

Responsiveness of quantity supplied to a price change

22
Q

Determinants of price elasticity of supply

A

Time, nature of industry

23
Q

How does time affect PES?

A

If producer responds quickly to change price is elastic, difficult to increase supply on short notice → supply tends to be inelastic, time increases supply elasticity,

24
Q

How does the nature of an industry affect PES?

A

Agriculture is inelastic because they can’t respond to demand quickly, manufactured goods are elastic because they can easily expand output