Chapter 6: Elasticity Flashcards
KEY TERM:
PED
the ratio of the percent change in the quantity demanded to the percent change in the price as we move along the demand curve.
KEY TERM:
Perfectly Inelastic Demand
the case in which the quantity demanded does not respond at all to changes in the price; the demand curve is a vertical line.
KEY TERM:
Perfectly Elastic Demand
the case in which any price increase will cause the quantity demanded to drop to zero; the demand curve is a horizontal line.
KEY TERM:
Midpoint Method
a technique for calculating the percent change in which changes in a variable are compared with the average, or midpoint, of the starting and final values.
KEY TERM:
Total Revenue
the total value of sales of a good or service (the price of the good or service multiplied by the quantity sold).
KEY TERM:
CPED
a measure of the effect of the change in the price of one good on the quantity demanded of the other; it is equal to the percent change in the quantity demanded of one good divided by the percent change in the price of another good.
KEY TERM:
YED
the percent change in the quantity of a good demanded when a consumer’s income changes divided by the percent change in the consumer’s income.
KEY TERM:
PES
a measure of the responsiveness of the quantity of a good supplied to the price of that good; the ratio of the percent change in the quantity supplied to the percent change in the price as we move along the supply curve.
KEY TERM:
Perfectly Inelastic Supply
the case in which the price elasticity of supply is zero, so that changes in the price of the good have no effect on the quantity supplied; the perfectly inelastic supply curve is a vertical line.
KEY TERM:
Perfectly Elastic Supply
the case in which even a tiny increase or reduction in the price will lead to very large changes in the quantity supplied, so that the price elasticity of supply is infinite; the perfectly elastic supply curve is a horizontal line.
Factors affecting PED
Nature of good – luxury or necessity
Availability of close substitutes
Share of income spent – costing a significant share of consumer income will lead to greater elastic demand as consumers are willing to spend more time searching for alternatives or giving up the product.
Time elapsed since price change - the long-run price elasticity of demand is often higher than the short-run elasticity.
Factors affecting PES
Availability of inputs - tends to be large when inputs are readily available and can be shifted into and out of production at a relatively low cost.
Time - long-run price elasticity of supply is often higher than the short-run elasticity.
Easy of storage.
Spare capacity.
Two countervailing effects of a seller changing price?
Price effect (the change in price at which each unit is sold) and quantity effect (the change in quantity of units sold) .
