2.6 Elasticity Flashcards
The role of markets (43 cards)
What is elasticity?
The sensitivity of one variable to changes in another variable
The extent to which buyers and sellers respond to particular change in market conditions
When would the demand curve be elastic?
Change in demand > change in price
When would the demand curve be inelastic?
Change in demand < change in price
What determines if something is a price elastic good?
If there’s close substitute, if it’s a luxury, the higher the prop. of income a product takes up the more elastic and if it has a long time period under consideration
What determines if something is a price inelastic good?
If there’s no substitute, if it’s a necessity, the less the prop. of income a product takes up the more inelastic and if it has a short time period under consideration
What is the price elasticity of demand (PED)?
The responsiveness of the quantity demanded to a change in the price of a good/service
What’s the equation for PED?
%Δ quantity demanded
/
%Δ price
What will the PED always be?
Negative
When will the PED be smaller than -1?
If the %Δ in QD is larger than %Δ in price (therefore it’s elastic)
When will the PED be between 0 and -1?
If the %Δ in QD is smaller than the %Δ in price (therefore it’s inelastic)
What is the PED is exactly -1?
It’s proportional
What is total revenue?
- price x quantity sold
- The total money a firm receives from selling goods/services
What is income elasticity of demand (YED)?
How responsive quantity demanded is following a change in consumer income
What’s the equation for YED?
%Δ quantity demanded
/
%Δ income
What happens if the YED is positive or negative?
Positive: normal good (increase in demand when income goes up) e.g. clothing, electronics
Negative: inferior good (decrease in demand when income goes up) e.g. store brand products, public transport
For YED, when is a good an elastic inferior good?
If the YED value is below -1. Curve has negative gradient almost perfectly horizontal
For YED, when is a good an inelastic inferior good?
If the YED value is between -1 and 0. Curve has negative gradient almost perfectly vertical
For YED, when is a good an inelastic normal good?
If the YED value is between 0 and 1. Curve has positive gradient almost perfectly vertical
For YED, when is a good an elastic normal good?
If the YED value is above 1. Curve has positive gradient almost perfectly horizontal
What factors determine the value of YED?
- Level of income (higher income, more inelastic)
- Availability of substitutes (few substitutes, demand is not sensitive to change)
- Degree of necessity (necessary: normal inelastic)
What is cross elasticity of demand (XED)?
The responsiveness of quantity demanded for one good/service in relation to a change in price of some other good/service
What’s the equation for XED?
%Δ price of product B
What does a positive and negative XED suggest?
Positive suggests a substitute relationship (increase in price of B would increase in demand of A)
Negative suggests a complimentary relationship (increase in price B would decrease in demand of A)
What does it mean if the value of the XED is close to 0?
The products have weak complimentary