Chapter 5: Elasticity Flashcards
(81 cards)
What is elasticity defined as?
A measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants
What is price elasticity of demand?
A measure of how much the quantity demanded of a good responds to the change in price of that good,
How is price elasticity of demand computed?
%change in quantity demanded/ %change in price
Demand for a good is said to be elastic if…
the quantity demanded responds substantially to changes in price
Demand is said to be inelastic if…
The quantity demanded responds only slightly to changes in the price.
Why do goods with close substitutes tend to have more elastic demand?
It is easier for consumers to switch from that good to others.
Demand for which good is more elastic: eggs or butter? Why?
Butter. Butter can easily be switched to margarine, but eggs cannot easily be replaced
What are the four factors which influence price elasticity of demand?
1) Availability of close substitutes
2) Necessities VS luxuries
3) Definition of the market
4) Time horizon
How do necessities have different elasticities than luxuries
People cannot avoid necessities; but they will easily skimp on luxury items they don’t need if times get rough
Why are narrowly defined markets more elastic than widely defined markets?
It is easier to find substitutes for narrowly defined goods (chocolate vs vanilla) than wider defined markets (market for food).
How does elasticity change over time.
Very inelastic in the short term, becomes very elastic in the long term.
How do you compute the price elasticity of demand?
% Change in quantity demanded/ % Change in price
A 10 percent increase in the price of an ice cream cone that results in a demand decrease of 20 percent is equal to what elasticity?
20%/10% = 2
Why do price elasticities, outside the course, sometimes have negative signs?
Because an increase in price results in a decrease in quantity demanded. (-20%/10%)
In this course, price elasticities are always reported with the ____ value
absolute value
Does elasticity have a unit?
No.
Why do we use the midpoint method to calculate elasticities?
the percentage change between two points will change simply because they are calculated from a different base.
What is the midpoint method formula?
((Q2-Q1)/(Q2+Q1)/2)/
((P2-P1)+(P2+P1)/2)
Demand is considered elastic when elasticity is ___
greater than 1
Demand is considered inelastic when elasticity is ___
less than 1
When elasticity is greater than 1, the quantity demanded moves proportionally _____ than the price
more
When elasticity is less than 1, the quantity demanded moves proportionally _____ than the price
less
When elasticity is exactly one, the percentage change in quantity ____
equals the change in price
What is another word for an elasticity of 1?
Unit elasticity