Chapter 5: Elasticity Flashcards

(81 cards)

1
Q

What is elasticity defined as?

A

A measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants

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2
Q

What is price elasticity of demand?

A

A measure of how much the quantity demanded of a good responds to the change in price of that good,

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3
Q

How is price elasticity of demand computed?

A

%change in quantity demanded/ %change in price

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4
Q

Demand for a good is said to be elastic if…

A

the quantity demanded responds substantially to changes in price

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5
Q

Demand is said to be inelastic if…

A

The quantity demanded responds only slightly to changes in the price.

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6
Q

Why do goods with close substitutes tend to have more elastic demand?

A

It is easier for consumers to switch from that good to others.

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7
Q

Demand for which good is more elastic: eggs or butter? Why?

A

Butter. Butter can easily be switched to margarine, but eggs cannot easily be replaced

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8
Q

What are the four factors which influence price elasticity of demand?

A

1) Availability of close substitutes
2) Necessities VS luxuries
3) Definition of the market
4) Time horizon

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9
Q

How do necessities have different elasticities than luxuries

A

People cannot avoid necessities; but they will easily skimp on luxury items they don’t need if times get rough

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10
Q

Why are narrowly defined markets more elastic than widely defined markets?

A

It is easier to find substitutes for narrowly defined goods (chocolate vs vanilla) than wider defined markets (market for food).

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11
Q

How does elasticity change over time.

A

Very inelastic in the short term, becomes very elastic in the long term.

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12
Q

How do you compute the price elasticity of demand?

A

% Change in quantity demanded/ % Change in price

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13
Q

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?

A

20%/10% = 2

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14
Q

Why do price elasticities, outside the course, sometimes have negative signs?

A

Because an increase in price results in a decrease in quantity demanded. (-20%/10%)

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15
Q

In this course, price elasticities are always reported with the ____ value

A

absolute value

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16
Q

Does elasticity have a unit?

A

No.

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17
Q

Why do we use the midpoint method to calculate elasticities?

A

the percentage change between two points will change simply because they are calculated from a different base.

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18
Q

What is the midpoint method formula?

A

((Q2-Q1)/(Q2+Q1)/2)/
((P2-P1)+(P2+P1)/2)

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19
Q

Demand is considered elastic when elasticity is ___

A

greater than 1

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20
Q

Demand is considered inelastic when elasticity is ___

A

less than 1

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21
Q

When elasticity is greater than 1, the quantity demanded moves proportionally _____ than the price

A

more

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22
Q

When elasticity is less than 1, the quantity demanded moves proportionally _____ than the price

A

less

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23
Q

When elasticity is exactly one, the percentage change in quantity ____

A

equals the change in price

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24
Q

What is another word for an elasticity of 1?

A

Unit elasticity

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25
A flatter curve has more or less elasticity?
more
26
What is perfect elasticity on a graph?
horizontal curve
27
What is perfect inelasticity on a graph?
vertical curve
28
What is the quantity change on a perfectly inelastic price increase
None
29
On a perfectly elastic demand curve, a price below the curve leads to what demand?
infinite.
30
On a perfectly elastic demand curve, a price above the curve leads to what demand?
zero
31
On a perfectly elastic demand curve, a price on the curve leads to what demand?
Any amount of a good. Consumers will buy any good.
32
What is total revenue?
The amount a firm receives for the sale of its output
33
How is total revenue calculated?
Price times the quantity sold
34
What is the total revenue of a price of $10 and 400 sold
$4,000
35
If demand is elastic, then an increase in price causes a ____ in revenue. Why?
decrease. The fall in quantity sold is proportionally greater than the extra revenue from the price
36
If demand is inelastic, then an increase in price causes a ____ in revenue. Why?
increase. The extra revenue from the higher price is proportionally higher than the loss from the fall in quantity sold.
37
Are eggs elastic or inelastic?
inelastic
38
Is health care elastic or inelastic?
inelastic
39
Is rice inelastic?
yes
40
Is beef inelastic?
no.
41
When demand is inelastic, price and revenue move in the ____
same direction
42
When demand is elastic, price and revenue move in____
opposite directions
43
If demand is unit elastic, total revenue ___ when the price changes
remains constant
44
Is the slope of a linear demand curve constant?
yes
45
Is the elasticity of a linear demand curve constant?
no
46
Why does elasticity change at different points on the demand curve?
Because the % change between the points on each axes changes. At a low price, each additional price increase is proportionally huge, but at higher prices it is not; the same is true for quantity demanded.
47
At points with a low price and high quantity, the demand curve is what elasticity?
inelastic
48
At points with a high price and low quantity the demand curve is what elasticity?
elastic
49
Constant elasticity means what shape of curve?
Nonlinear
50
What is income elasticity of demand?
A measure of how much the quantity demanded of a good responds to a change in the consumers' income,
51
How is income elasticity of demand computed?
%Change in quantity/% change in income
52
With an inferior good, higher income ____ the quantity demanded
lowers
53
Inferior goods have ____ elasticities
negative
54
What is Engel's law.?
As a family's income rises, the percent of its income spent on food declines, indicating an income elasticity less than 1
55
A measure of how much the quantity demanded of one good responds to a change in the price of another good-- is called what?
cross-price elasticity of demand?
56
How is cross-price elasticity of demand computed?
Percentage change in quantity demanded of good 1/ Percentage change in the price of good 2
57
The cross-price elasticity of substitutes are
positive
58
What is the cross-price elasticity of complements?
Negative.
59
How does the cross-price elasticity of bread and butter work?
As the price of bread increases, the demand for butter decreases-- the elasticity is negative.
60
What is price elasticity of supply?
A measure of how much the quantity supplied of a good responds to a change in the price of that good.
61
How is price elasticity of supply computed?
% Change in quantity supplied divided by % change in price
62
Does beachfront land have an elastic supply?
no. I tis almost impossible to produce more of it.
63
Is supply usually more elastic in the long or short run?
Long-run
64
At a a perfectly elastic supply curve, what happens to the supply the market price is below the line?
Zero
65
With an elasticity greater than 1, a 22% price increase...
leads to a quantity supplied of more than 22% increase
66
The ability of firms to enter and exit a market means that the supply curve in the long run is...
more elastic
67
If the price elasticity of supply is zero, the supply curve is
vertical
68
As a farmer with inelastic price elasticity of supply and demand, how does a productivity increase affect you?
the total revenue falls the supply curve shifts to the right, but the demand curve is steep so the price of wheat falls.
69
Why do farmers adopt technologies that might make them worse-off due to inelastic demand?
There are many farmers so they all must take the price of wheat as given; producing more at a lower price allows them to sell. this is historically what happened with the rural exodus and farm output.
70
Why is there a restriction on fairy and egg production in Canada, to help the farmers?
With inelastic demand, farmers receive greater total revenue if they supply a smaller amount. No individual farmer would choose to restrict supply, but it makes everyone as a whole better off.
71
A policy that raises farmer incomes is good for consumers with low elasticity?
Not really.
72
Why was the OPEC embargo initially effective.
In the short run, oil had very inelastic demand and supply. A shift in supply results in a very large price increase and revenue.
73
Why was the long-run effect of OPEC less profitable.
In the long-run, supply and demand were more elastic; alternative fuel sources and conservation efforts were found so the price of oil had to lower.
74
Why might drug interdiction increase drug related crime?
Demand is inelastic, so a decrease in supply sharply increases the price for a small reduction in quantity.
75
How is drug-use elastic over longer periods?
Higher prices might discourage experimentation among youth and lead to few addictions.
76
If someone spends a third of their income on clothes, what is their income elasticity of demand?
1. Any income she receives, 1/3 will go to clothes.
77
If someone spends a third of their income on clothes, what is their price elasticity of demand?
1. With every decrease in the price of clothes, she will be able to buy less clothes.
78
If someone goes from spending a third of their income on food to a quarter of income, what is the change in income elasticity of demand?
Nothing.
79
A positive cross-price elasticity of demand means that
Goods are substitutes
80
A negative cross-price elasticity of demand means that
goods are complements
81