Chapter 5 Flashcards
(40 cards)
What is price elasticity of demand (PED)
The responsiveness of the quantity demanded of a good to a change in its price.
What is the formula for price elasticity of demand
%ChangeinPrice /
%ChangeinQuantityDemanded
What is an example of PED
If a 10% increase in the price of ice cream causes the quantity demanded to decrease by 20%, the PED is
−2 (elastic demand).
What determines the price elasticity of demand
- availability of substitutes
- necessities vs luxuries
- definition of the market
- time horizon
explain availability of substitutes
Goods with more substitutes tend to have more elastic demand.
explain Necessities vs Luxuries
Necessities tend to have inelastic demand, while luxuries have elastic demand.
explain definition of the market
Narrowly defined markets tend to have more elastic demand than broadly defined markets.
explain time horizon
Demand is more elastic in the long run than in the short run.
What is total revenue and price elasticity of demand
Total Revenue (TR): The total amount of money a firm receives from sales (TR=Price×Quantity)
What is the formula for total revenue and price elasticity
TR=Price×Quantity).
What is elastic demand
If demand is elastic, a price increase reduces total revenue.
What is inelastic demand
If demand is inelastic, a price increase increases total revenue.
What is Income Elasticity of Demand (YED)
The responsiveness of the quantity demanded to a change in consumer income.
What is the formula for
IncomeElasticityofDemand
IncomeElasticityofDemand
=%ChangeinQuantityDemanded/
%ChangeinIncome
Example: If a 10% increase in income causes the quantity demanded of a normal good to increase by 15%, the YED is
1.5
What is Cross-Price Elasticity of Demand (XED)
The responsiveness of the quantity demanded of one good to a change in the price of another good.
What is the formula for Cross-PriceElasticityofDemand
Cross-PriceElasticityofDemand=
%ChangeinQuantityDemandedofGood1 /
%ChangeinPriceofGood2
Example: If a 5% increase in the price of coffee causes a 10% increase in the quantity demanded of tea, the XED is
2
2 (substitutes).
what is Price Elasticity of Supply (PES)
The responsiveness of the quantity supplied of a good to a change in its price.
What is the formula for PES
PriceElasticityofSupply=%ChangeinQuantitySupplied / %ChangeinPrice
Example: If a 15% increase in the price of oranges leads to a 30% increase in the quantity supplied, the PES is
2 (elastic supply)
What are the determinantes of price elasticity of supply
- flexibility of producers
- time horizons
What is Flexibility of Producers
Flexibility of Producers: Goods that can be easily produced or stored have more elastic supply.
What is Time Horizon
Time Horizon: Supply is more elastic in the long run than in the short run.
Explain elasticity and tax incidence
Tax Incidence: The manner in which the burden of a tax is shared among participants in a market.
Inelastic Demand or Supply: When demand or supply is inelastic, the tax burden falls more on the side of the market that is less elastic.
Example: If the government imposes a tax on gasoline and the demand for gasoline is inelastic, consumers will bear most of the tax burden.
Explain elasticity and price controls
Price Ceilings and Floors: Elasticity helps to understand the effects of price controls like ceilings (maximum prices) and floors (minimum prices).
Example: Rent control (a price ceiling) in a city with inelastic supply of housing can lead to shortages and reduced quality of housing.
Explain elasticity in international trade
Trade Policies: Elasticity of demand and supply can influence the effects of tariffs and quotas on international trade.
Example: A tariff on imported goods will have different effects on total revenue and domestic market depending on the elasticity of demand and supply for those goods.
