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Flashcards in Elasticity Deck (24)
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1

What must the midpoint value be to be elastic?

Greater than 1

2

What must the midpoint value be to be inelastic?

Less than 1

3

What must the midpoint value be to be unitary?

1 (45°/directly proportionate)

4

How is elasticity of demand measured?

Ed = quantity change/average x price average/change

5

Factors affecting price elasticity of demand

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

6

How does substitute availability affect elasticity?

The greater number of substitutes, the greater the elasticity

7

Who benefits from price inelasticity?

Producers and government (if taxed)

8

Who benefits from price elasticity?

Consumers

9

What makes a product price elastic?

Demand highly sensitive to small price changes

10

What are the three ways of measuring elasticity?

Midpoint method, total revenue, income elasticity

11

Midpoint method

Qd change/Q average x P average/P change

12

Total revenue

TR = PxQ
Direct relationship is inelastic, inverse relationship is elastic

13

Income elasticity

Ey = % Q change/% Y change

14

Price Elasticity of Demand

Responsiveness of quantity demanded to a change in price

15

Inferior good income elasticity

Negative, less than 0

16

Normal good income elasticity

Positive, greater than 1

17

How does availability of substitutes affect PED?

Easy to switch if price changes, options

18

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

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

How does proportion of income spent affect PED?

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

How does time affect PED?

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

Price elasticity of supply

Responsiveness of quantity supplied to a price change

22

Determinants of price elasticity of supply

Time, nature of industry

23

How does time affect PES?

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

How does the nature of an industry affect PES?

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