Chapter 5 - Elasticity and Its Application Flashcards Preview

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Flashcards in Chapter 5 - Elasticity and Its Application Deck (21)
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1
Q

Elasticity

A
  • a numerical measure of how much one variable responds to changes in another variable
  • e.g. how responsive is QD (or QS) to a change in one of its determinants
2
Q

Elasticity of X and Y

A
  • measures how much X responds to a change in Y

- Elasticity of X and Y = %change in X/%change in Y

3
Q

Price Elasticity of Demand

A

% change in Qd/% change in P

4
Q

Midpoint Method (for calculating percent change)

A

= end value - start value/midpoint x 100

Midpoint: the number halfway between the start and end values

5
Q

Determinants of Price Elasticity

A
  • the extent to which close substitutes are available
  • how broadly or narrowly the good is defined
  • Whether the good is a necessity or luxury
  • long-run v. short-run
6
Q

Examples of Elasticity

A
  • higher when close substitutes are available
  • higher for narrowly defined goods
  • higher for luxuries than for necessities
  • higher in the Long-Run than the Short-Run
7
Q

Variety of Demand Curves

A
  • The flatter the demand curve the larger the elasticity

- vice versa

8
Q

Perfectly Inelastic Demand

A

E = 0

  • demand curve is vertical
  • Price sensitivity is none
9
Q

Inelastic Demand

A

0

10
Q

Unit Elastic Demand

A

E = 1

  • demand curve is intermediate slope
  • price sensitivity is proportional
11
Q

Elastic Demand

A

E > 1

  • demand curve is relatively flat
  • price sensitivity is relatively high
12
Q

Perfectly Elastic Demand

A

E = infinite

  • demand curve is horizontal
  • price sensitivity is extreme
13
Q

Price Elasticity of Supply

A
  • measures how much quantity supplied responds to a change in price

% change in Qs / % change in P

14
Q

Variety of Supply Curves

A
  • the flatter the supply curve the large the elasticity

- vice versa

15
Q

Perfectly Inelastic (Supply)

A

E = 0
Supply Curve: vertical
Price Sensitivity: None

16
Q

Inelastic Supply

A

0

17
Q

Unit Elastic Supply

A

E = 1
Supply Curve: intermediate slope
Price Sensitivity: proportional

18
Q

Elastic Supply

A

E > 1
Supply Curve: relatively flat
Price Sensitivity: relatively high

19
Q

Perfectly Elastic Supply

A

E = infinite
Supply Curve: horizontal
Price Sensitivity: extreme

20
Q

Income Elasticity of Demand

A
  • measures the response of Qd to a change in consumer income

% change in Qd / % change in income

21
Q

Cross-Price Elasticity

A
  • measures the response of demand for one good to changes in the price of another good

% change in Qd1 / % change in P2