Chapter 4 - Elasticity Flashcards Preview

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Flashcards in Chapter 4 - Elasticity Deck (53)
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1

elastic demand def

qt demanded very responsive to change in products price

2

inelastic demand def

qt demanded is very unresponsive to change in products price

3

Elasticity is related to the _______ of the _______ curve but ________

slope. demand. not exactly the same

4

Conditions to do comparison of elasticity of 2 demand curves - with respect to a shift in supply (2) and what if conditions not met

1) 2 figures drawn on same scale
2) Start from same price-quantity equilibrium
otherwise, need % change in price and qts of products

5

elasticity symbol

η (eta)

6

How to determine elasticity of demand at a particular point in demand curve

1) This point is (Qd bar, p bar) bar = fix. 2) Choose a point above and a point below (q1,p1) and (q2,p2)
3) η = delta Q / Q bar divided by delta P / P bar

7

sign of η and what economists do

negative. economists emphasize absolute value

8

Actual η formula considering that the middle point is the average of the two points around

η = (Q1 - Q0)/(Q1 + Q0) divided by (P1 - P0)/(P1 + P0)

9

Other way of writing the η formula and what first part is

η = delta Q/delta P multiplied by P bar / Q bar. First part is reciprocal (inverse) of the slope

10

How elasticity behaves along a linear demand curve

falls down as you move down linear demand curve

11

5 points/regions important on linear demand curve

1) Top : η =infinity, Perfectly elastic 2) Elastic η>1 3) Unit elastic η=1 4) Inelastic η<1 5) Perfectly inelastic η=0

12

Which of the 5 points/regions important on linear demand curve will producers try to reach and why

Unit elastic point (η=1) to maximize expenditure

13

3 demand curves with constant elasticity

Vertical, horizontal and hyperbol for which demand*price is constant (p=a/q)

14

Horizontal curve elasticity and value

Perfectly elastic (η=infinity - REMEMBER IT IS THE RECIPROCAL OF THE SLOPE)

15

Vertical curve elasticity and value

Perfectly inelastic (η=0)

16

Hyperbol curve (p=a/q) elasticity value

elasticity = 1

17

Linear demand slope and elasticity

constant slope (constant relation of changes in P and Q) and different elasticities

18

Non-linear demand curve

not constant slope (relation of changes in P and Q changes) and elasticities may vary along the curve

19

what determines elasticity of demand

Availability of substitutes.

20

when is demand elasticity high

when there are many close substitutes

21

what determines availability of substitutes (3)

1) length of the time interval considered (time given to consumer to react)
2) wether the good is a necessity or a luxury
2) how specifically the product is defined

22

Short run vs long-run equilibrium following an increase in supply

in the long run, demand is more elastic. demand turns along the initial equilibrium point

23

narrowly defined products demand elasticity

more elastic demand (can be replaced easily)

24

What total expenditure depends on

relative changes in price and quantity

25

Total expenditure formula

Price x quantity

26

Total expenditure behavior when elastic demand (η > 1)

Higher price = smaller TE, lower price = higher TE

27

Total expenditure behavior when inelastic demand (η

Higher price = higher TE, lower price = lower TE

28

where total expenditure reaches a maximum

when demand is unit elastic (η = 1)

29

price elasticity of supply ηs formula

delta Q supplied / average Q supplied divided by delta price / average price

30

What influences elasticity of supply

How easily firms can increase output in response to higher price