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Flashcards in Elasticity Deck (27)
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1
Q

Price Elasticity Definition

A

Ratio between % change in quantity demanded or supplied compared to corresponding change in price

2
Q

Price Elasticity of Demand Equation

A

% change in Qd / % change in P

3
Q

Price Elasticity of Supply Equation

A

% change in Qs / % change in P

4
Q

Elastic Demand/Supply Equation

A

% change in Q / % change in P > 1

High response in D/S to changes in price

5
Q

Unitary Elasticity Demand/Supply Equation

A

% change in Q / % change in P = 1

Equal response in D/S compared to changes in P

6
Q

Inelastic Demand/Supply Equation

A

% change in Q / % change in P < 1

Low response in D/S compared to changes in P

7
Q

Midpoint Elasticity Equation for Q

A

% change Q = {(Q2-Q1) / [(Q2-Q1)/2] X 100}

8
Q

Midpoint Elasticity Equation for P

A

% change P = {(P2-P1) / [(P2-P1)/2] X 100}

9
Q

Constant Unitary Elasticity

A

Occurs when a price change of 1% creates and equal D/S change of 1%

10
Q

Elastic Demand and the Effect on Revenue

A

If price is raised on an elastic good, which has a high response to price changes, there will be a large shift in demand and a loss in revenue.

11
Q

Unitary Elasticity of Demand and the Effect on Revenue

A

If price is raised on a unitarily elastic good, which has an equal reaction to price changes, there will be no change in overall revenue

12
Q

Inelastic Demand and the Effect on Revenue

A

If price is raised on an inelastic good, which has a low response to price changes, there will be a small shift in demand and a gain in revenue

13
Q

What Effect do Taxes Have on Supply and Demand

A

The tax burden falls on the most inelastic side of the market

If D is more inelastic than S the consumers bear the tax burden

14
Q

What Effect do Taxes Have on Inelastic Demand?

A

There is a low response in demand to price changes so the consumer pays the higher price and takes the tax burden

15
Q

What Effect do Taxes Have on Elastic Demand?

A

There is a high response in demand to price changes so the supplier takes on the tax burden

16
Q

What Effect do Taxes Have on Inelastic Supply?

A

Changes in price do not have a large impact on Q but a large impact on P

Businesses are forced to take the lower price and take on the burden

17
Q

What Effect do Taxes Have on Elastic Supply?

A

Changes in price have a large impact on Q but a small impact on price

Consumers are forced to take on the burden of the tax

18
Q

Government requires auto manufacturers to install new equipment that costs $2,000 per car.

What conditions are needed for consumers to pass this to buyers?

What conditions force the manufacturer to pay?

A

If demand is more inelastic than supply then the consumer takes the price of the equipment

If demand is more elastic than supply then the supplier takes the price of equipment

19
Q

Assume that the company wants to earn as much revenue as possible. If the elasticity of demand for your company’s product at the current price is 1.4, would you advise the company to raise the price, lower the price, or to keep the price the same? What if the elasticity were 0.6? What if it were 1?

A

If elasticity > 1 than an increase in price will cause a large decrease in Qd compared to P and a loss in revenue.

If elasticity is >1 a decrease in P will cause a large increase in Qd compared to P and an increase in revenue

If elasticity is < 1 than an increase in price will create a smaller decrease in Qd compared to P and an overall increase in revenue.

If elasticity is <1 than a decrease in P will create a smaller decrease in Qd compared to P and an overall decrease in revenue

If elasticity = 1 overall revenue stays the same no matter which direction price goes

20
Q

If demand is elastic, will shifts in supply have a larger impact on Q or P?

A

A shift in S will have a large impact on Q and a small impact on P

21
Q

If supply is elastic, will shifts in demand have a larger effect on Q or P?

A

A shift in D will have a large impact on P and a small impact on Q

22
Q

Income Elasticity of Demand Equation and the Effects on Normal/Inferior goods

A

% change in Qd / % change in income

+ elasticity of demand: a rise in income causes an increase in Qd = normal good

  • elasticity: rise in income causes a decrease in Qd = inferior good
23
Q

Cross-Price Elasticity of Demand

A

% change in Qd of A / % change in P of B

24
Q

Cross-Price Elasticity of Demand and the Effects on Complimentary/Substitute Goods

A

+ cross-price elasticity then the goods are substitutes

  • cross-price elasticity then the goods are compliments
25
Q

Wage Elasticity of Labor Supply

A

% change in Q in L supplied / % change in wage

change in hours worked / change in wages

26
Q

Elastic Wage Elasticity of Labor Supply

A

A small change in wages creates a large change in labor hours worked

  • younger people are willing to work more for a small increase in wages
27
Q

Inelastic Wage Elasticity of Labor Supply

A

A large change in wages crates a small change in labor hour worked

  • older workforce is less willing to work more hours when wages increase