Module 12.1: Elasticity Flashcards
What is own-price elasticity?
Measures the responsiveness of the quantity demanded to a change in price, if an increase in price causes a decrease in quantity demanded, own-price elasticity is negative.
What are the three factors that affect demand elasticity?
1) availability of substitutes - when there are substitutes, tends to be more elasticity
2) portion of income spent on a good - the larger proportion of income spent on a good, the more elastic an individual’s demand for that good.
3) time - elasticity tends to be greater the longer the time period since the price change.
What is unitary elasticity? What does it mean in terms of revenue?
Price and quantity combination for which price elasticity equals -1.0 (unit or unitary elasticity). Total revenue is maximized at this price.
What is income elasticity? how is it measured?
The sensitivity of quantity demanded to a change in income is termed income elasticity. It is measured by taking the percentage change in quantity demanded to the percentage change in income.
What are normal goods vs. inferior goods?
normal goods - income elasticity is positive for most normal goods. positive means an increase in income leads to increase in quantity demanded.
inferior goods - increase in income leads to a decrease in quantity demanded.
What is cross price elasticity of demand?
The ratio of the percentage change in the quantity demanded of a good to the percentage change in the price of a related good
What does it mean when cross price elasticity of demand is positive? negative?
positive - increase in price of related good equals increase in demand for good, meaning they are good substitutes.
negative - increase in price of related good equals decrease in demand for good, meaning they are complements.
What is the formula for price elasticity?
p0/q0 * change in Q / change in P
change in Q / change in P = slope of the demand function (take the number before p)
