Chapter 4 - Elasticity Flashcards Preview

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Flashcards in Chapter 4 - Elasticity Deck (21):
1

Elasticity

A measure of how much one economic variable, ie. quantity demanded, responds to changes in another economic variable, i.e. price.

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Price elasticity of demand

The responsiveness of the quantity demanded to a change in price, measured by dividing the % change in the quantity demanded of a product by the % change in the products price.

3

The price elasticity of demand is not the same as the slope of the demand curve

and it is always NEGATIVE

4

Elastic demand

demand is elastic when the % change in quantity demanded is greater than the % change in the price. So the price elasticity is greater than 1 in absolute value.

5

Inelastic demand

Demand is inelastic when the % change in quantity demanded is less than the % change in price, so the price elasticity is less than 1 in absolute value.

6

Unit-elastic demand

Demand is unit-elastic when the % change in quantity demanded is equal to the percentage change in price, so the price elasticity is EQUAL to one in absolute value.

7

Formula Price Elasticity of Demand

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The midpoint formula

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Elastic & Inelastic Graphing example

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Perfectly inelastic demand

Demand is perfectly inelastic when a change in price results in no change in quantity demanded. I.e. Insulin demand (petrol a bit)

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Perfectly elastic demand

Demand is perfectly elastic when a change in price results in an infinate change in quantity demanded.

12

The determinants of the price elasticity on demand are:

  • Availability of substitutes
  • The length of time involved
  • Luxuries VS Necessities
  • Definition of the market
    • Share of expenditure on the goods in the consumers budget

13

Total revenue

The total amount of funds received by the seller of a good or service, calculated by multiplying the price per unit by the number of units sold.

I.e. Price per unit x number of units sold

14

If demand is inelastic a price decrease will decrease total revenue.

If it is elastic, a price increase will increase total revenue.

15

Cross price elasticity and revenue

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16

Cross price elasticity of demand

The % change in the quantity demanded of one good or service divided by the % change in the price of another good or service.

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17

Income elasticity on demand

A measure of the responsiveness of quantity demanded to the changes in income, measured by the % change in quantity demanded by the % change in income

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18

If quantity demanded increases with incomes, it is a NORMAL good. If it decreases as incomes increase, it is an INFERIOR good.

If quantity demanded increases over 10% with a 10% income increase it is a luxury good.

19

Price elasticity of supply

The responsiveness of the quantity supplied to a change in the price, measured by dividing the %change in the quantity supplied of a product by the % change in the products price.

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Determinants of price elasticity of supply

  • Length of time involved
  • Type of industry
  • Availability of inputs.
  • Existing capacity
  • Inventories held

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