Elasticity Flashcards
(23 cards)
What is elasticity in economics?
It measures the responsiveness of quantity demanded or supplied to changes in price or other factors.
What is the formula for Price Elasticity of Demand (PED)?
PED=
%changeinquantitydemanded/ %changeinprice
Why is PED usually negative?
Because price and quantity demanded move in opposite directions due to the law of demand.
What does the absolute value of PED represent?
he magnitude of responsiveness, ignoring the negative sign.
What is the midpoint formula for PED?
Demand is elastic – quantity is very responsive to price changes.
What if PED < 1?
Demand is inelastic – quantity is not very responsive.
What if PED = 1?
Unit elastic – total revenue remains unchanged when price changes.
What is perfectly inelastic demand?
PED = 0. Quantity demanded doesn’t change with price.
What is perfectly elastic demand?
PED = ∞. A tiny price change causes infinite change in quantity.
What is perfectly inelastic supply?
PES = 0. Quantity supplied is fixed, regardless of price.
What is perfectly elastic supply?
PES = ∞. Firms will supply any amount at a given price.
What factors influence PED?
Availability of substitutes
Passage of time
Necessities vs luxuries
Market definition (narrower = more elastic)
Share of budget spent on the good
What happens to total revenue when demand is inelastic and price increases?
Total revenue increases.
What happens when demand is elastic and price increases?
Total revenue decreases.
What is cross-price elasticity of demand?
XED=
%changeindemandforGoodA/%changeinpriceofGoodB
What does a positive XED mean?
The goods are substitutes.
What does a negative XED mean?
The goods are complements.
What is income elasticity of demand (YED)?
YED=
%changeinquantitydemanded/ %changeinincome
What does a positive YED mean?
The good is normal.
What does a negative YED mean?
The good is inferior.
What is the formula for PES? Price Elasticity of Supply (PES)
PES=
%changeinquantitysupplied/%changeinprice
What are key determinants of PES?
Passage of time
Industry type
Availability of inputs
Spare capacity
Inventory levels
How do you find equilibrium using equations?
Set
𝑄𝑑=𝑄𝑠 and solve for 𝑃, then substitute to find𝑄
