Chapter 5- Elasticity and Its Application Flashcards
Elasticity
a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants
Price of Elasticity of Demand
a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price
Price of Elasticity of Demand simplified..
how much the quantity demanded responds to a change in price
Elastic
if the quantity demanded responds substantially to changes in the price
Inelastic
if the quantity demanded responds only slightly to changes in the price
Substitutes tend to have….
Goods with close substitutes tend to have more elastic demand
Necessities tend to have…
inelastic demands,
Luxuries tend to have….
elastic demands
Narrowly defined markets tend to have….
more elastic demand than broadly defined markets
Time Horizons
Goods tend to have more elastic demand over longer time horizons
Price elasticity of demand =
Percentage change in price
For example, a 10% increase in price, 20% decrease,
Calculate Elasticity of Demand
20%
= ——— = 2
10%
Midpoint method
computes a percentage change by dividing the change by midpoint (or average) of the initial and final levels
Midpoint method is often used when calculating….
the price elasticity of demand between two points
Price elasticity of demand=
(between two points; defined as Q1, P1, & Q2, P2
(Q2-Q1) / ((Q2+Q1) / 2)
= ————————————
(P2-P1) / ((P2+P1) / 2)
Demand is considered elastic if it is…
Greater than 1
Demand is considered inelastic if it…
Is less than 1
Demand is considered unit elastic if it….
Equals exactly 1
Total Renevue
the amount paid by the buyers and received by sellers of a good, computed as the price of the good times the quantity sold
Total Revenue Formula
P*Q
At points with a low price and high quantity the demand curve is….
Inelastic
At points with a high price and low quantity the demand curve is….
Elastic
Income Elasticity of Demand
measures how the quantity demanded changes as consumer income changes
Income Elasticity of Demand Formula
Percentage change in quantity demanded
= ——————————————————————–
Percentage change in income
