Ch. 5 Flashcards
(19 cards)
What is elasticity?
A measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants.
What is the price elasticity of demand?
A measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price.
When is the demand of a good inelastic?
If the quantity demanded responds only slightly to changes in the price.
How does a good having close substitutes effect its elasticity? What if it doesn’t have a close good?
Goods with close substitutes tend to have more elastic demand because it is easier for consumers to switch from that good to others (i.e. an increase in the price of butter, assuming the price of margarine is held fixed, the quantity of butter sold falls by a large amount). By contrast, because eggs are a food without a close substitute, the demand for eggs is less elastic than the demand for butter. A small increase in the price of eggs does not cause a sizable drop in the quantity of eggs sold.
Do necessities have inelastic or elastic demand? What about luxuries?
Necessities tend to have inelastic demands, whereas luxuries have elastic demands.
How does the elasticity of demand change for broad categories of goods vs narrow categories.
Broad categories of goods tend to be more inelastic because there are no good substitutes for them, like food. Narrowly defined markets have more elastic demand because it’s easy to find substitutes. Like with ice cream, it’s easy to find other desserts to substitute.
How does the elasticity of a good change over time?
Goods tend to have more elastic demand over longer time horizons. When the price of gasoline rises, the quantity of gasoline demanded falls only slightly in the first few months. Over time, however, people buy more fuel-efficient cars, switch to public transportation, and move closer to where they work. Within several years, the quantity of gasoline demanded falls more substantially.
How do you calculate the price elasticity of demand?
How do you calculate the price elasticity of demand between two points on a demand curve?
Use the midpoint method.
Describe the demand curves of the following scenarios:
1) perfectly inelastic demand, elasticity = 0
2) inelastic demand, elasticity <1
3) unit elastic demand, elasticity = 1
4) elastic demand, elasticity > 1
5) perfectly elastic demand, elasticity = infinity
What is total revenue?
The amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold.
How does total revenue change when price changes?
- When demand is inelastic, price and total revenue move in the same direction: If the price increases, total revenue also increases.
- When demand is elastic, price and total revenue move in opposite directions: If the price increases, total revenue decreases.
- If demand is unit elastic, total revenue remains constant when the price changes.
Describe elasticity along a linear demand curve.
What is income elasticity of demand?
The income elasticity of demand measures how the quantity demanded changes as consumer income changes. It is calculated as the percentage change in quantity demanded divided by the percentage change in income.
What is cross-price elasticity of demand?
A measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in price of the second good.
What is the price elasticity of supply?
A measure of how much the quantity supplied of a good responds to a change in the pric of that good, computed as the percentage change in quantity supplied divided by the percentage change in price.
Describe the supply curves of the following scenarios:
1) Perfectly inelastic supply, elasticity = 0
2) inelastic supply, elasticity <1
3) unit elastic supply, elasticity = 1
4) elastic supply, elasticity >1
5) perfectly elastic supply, elasticity = infinity
When is a good a normal, necessity, or inferior good?
When income elasticity of demand > 1, the good is a normal good.
When income elasticity of demand is between 0 and 1, it is a necessity.
When income elasticity of demand is < 0, it is an inferior good.
How does cross-price elasticity of demand help determine the relationship between two goods?
If Exy > 0, the goods are substitutes (an increase in the price of one good leads to an increase in demand for the other).
If Exy < 0, the goods are complements (an increase in the price of one good leads to a decrease in demand for the other).
