Elasticity Flashcards
(19 cards)
Price elasticity of demand formula
Percentage change in quantity demanded divided by percentage change in price
If quantity demanded does not change when price changes then…
The price elasticity of demand is zero and the good has a perfectly in elastic demand.
Why doesn’t a rise in price always increase total revenue.
Because of price elasticity of demand.
If the product is elastic then a cut in price would…
Increase quantity demanded and therefore increase total revenue
If the product is inelastic then a cut in price would…
Increase quantity demanded by less then the price cut and total revenue would decrease.
If the product was unit elastic then a cut in price would…
Increase the quantity demanded by the same amount and total revenue would remain unchanged.
What are the three factors that influence the elasticity of demand for a good.
The closeness and availability of substitutes. The time elapsed since a price change. The proportion of income spent on the good.
What is cross elasticity of demand.
Cross elasticity of demand measures the responsiveness of demand for a good to a change in the price of a substitute or a compliment, other things remaining the same.
Cross elasticity of demand formula
Percentage change in quantity demanded divided by percentage change in price of substitute or compliment.
If cross price elasticity of demand is positive then…
It’s a substitute
If cross price elasticity of demand is negative then…
Is a complement.
What is income elasticity of demand
Income elasticity of demand measures how the quantity demanded of a good responds to a change in come, other things equal.
Income elasticity of demand formula
Percentage change in quantity demanded divided by percentage change in income.
If income elasticity of demand is greater than 1 then…
Demand is income elastic and the good is a normal good.
If income elasticity of demand is between 0 and 1 then…
Demand is income inelastic and the good is a normal good.
If income elasticity of demand is less than 0 then…
The good is an inferior good.
What is elasticity of supply
Elasticity of supply measures the responsiveness of the quantity supplied to a change in the price of a good, when all other influences on selling plans remain the same.
Elasticity of supply formula
Percentage change in quantity supplied divided by percentage change in price.
What are the determinants of elasticity of supply
Resource substitution possibilities and time frame for supply decision.
