Chapter 4 Flashcards
(42 cards)
Responsive demand
A small change in price will likely cause many people to switch from one good to another
Unresponsive demand
Consumer’s an unwilling to change their behavior even when the price of a good or service changes.
Elasticity
A measure of the responsiveness of buyers and sellers to changes in price or income.
The price elasticity of demand
Measures the responsiveness of quantity demanded in a change in price.
Elastic
Quantity demanded changes significantly as as result of price changes.
Inelastic
Quantity demanded changes a small amount as a result of price changes.
What are the five determinants that pay a role in elasticity of demand?
1) The existence of substitutes. 2) The share of a budget of spend good. 3) Whether the good is a necessity or a luxury good. 4) How broadly defined the market is. 5) Time
T/F Whether demand is elastic or inelastic depends on the buyer’s preferences and resources
True.
Why is the share of a budge spend on a good important for elasticity?
On a big ticket item a small discount can amount to a significant amount of money. Think of your oled tv.
The existence of substitues
Most important factor for price elasticity of demand. If there are many substitutes for a good a price change in one could result in consumers switching to another good.
Whether the market is broadly or narrowly defined.
It is possible for the particulars of a market to be elastic while the market on the whole has elastic demand or vice versa. For instance the demand for a particular demand may be price sensitive, while demand for housing as a whole is inelastic.
Immediate Run
No time for consumers to adjust their behavior
Short run
Consumers can partially adjust their behavior
Long run
Consumers have time to fully adjust their behavior. Make decisions that reflect our wants, needs, and limitations of a long-time horizon.
Elasticity of Demand formula
Price Elasticity of Demand (Percentage change in the quantity demanded)/(Percentage change in price)
Midpoint Method
Avoid the reference point problem by comparing the change in price and quantity demanded to the average value of the quantity demanded and price.
Midpoint Method Formula
Elasticity of Demand (change in Q/average value of Q)/(change in P/average value of P)
Calculate the elasticity of demand using the midpoint formula for the following:
Price QD
12 20
6 30
-.60
Perfectly Inelastic demand
0/percentage change in price Vertical line on the graph
Relatively inelastic demand
small change/large change. Vertical line sloping slightly towards the right.
Relatively Elastic
Large Change/ small change. Horizontal line sloping downward a little.
Perfectly Elastic Demand
nearly infinite change/ very small change. Horizontal line.
Unitary Elasticity
Shift in price=shift in quantity demanded Ed=-1
How does time affect elasticity?
In the immediate run, consumers cannot make changes to their consumption for inelastic goods, but in the short run, and long run they can adjust their behavior.
