Elasticity Flashcards
(30 cards)
What kind of number is price elasticity of demand
A negative number
More negative the number, the larger the number is
What does a large value for price elasticity of demand mean
The quantity demanded changes a lot in response to a price change
When is demand price elastic
When price elasticity of demand is larger than 1
When is demand price inelastic
When price elasticity of demand is smaller than 1
When is demand unit price elastic
When price elasticity of demand is exactly equal to 1 or -1
How is price elasticity of demand calculated
At a specific price or quantity level
Ex: $3.00 or $3.50
What is the price elasticity midpoint formula
Price elasticity of demand =
( Q2 - Q1 ) / ( P2 - P1) -------- -------- Q1 + Q2. P1 + P2
% change in % change in
Quantity Price
What is elasticity related to
Slope
In elasticity, the curve with the higher slope =
A more negative elasticity
What does a vertical demand curve mean
Quantity demanded does not change as price changes.
Elasticity = 0
&
Is perfectly inelastic
What does a horizontal demand curve mean
Quantity demanded is infinitely responsive to price changes.
Elasticity is infinite
&
Is perfectly inelastic
What is the availability of close substitutes in elastic demand
If a product has more substitutes available it will have more elastic demand
Ex: gas = low
Nikes = high
What is the passage of time in elastic demand
Over time people can adjust their buying habits more easily,
Elasticity is higher in the long run.
Ex: gas prices rising
What is “ whether the good is a luxury or necessity” in price elasticity demand
People are more flexible with luxuries than necessities, so price elasticity of demand is higher for luxuries.
Ex: bread and milk are necessities
What is the definition of market in elastic demand
The more narrowly defined the market the more substitutes are available and hence the more elastic is demand.
Ex: no substitutes for miss me jeans so my demand is very inelastic
What is the share of a good in a consumers budget in elastic demand
If a good is a small portion of your budget you will likely not be very sensitive to its price.
Ex: salt
What is total revenue
The total amount of funds received by a seller of a good or service, calculated by price per unit X the number of units sold
What happens when your product is price inelastic
Customers aren’t sensitive to the price,
Expect to gain customers when you lower prices,
Customers don’t compete for lost revenue so revenue decreases
What happens when your product is price elastic
Customers are sensitive to price change,
Expect to gain customers when you decrease price
What is the formula for price elasticity of demand
P.E. of demand =
% change in quantity demanded
—————————————
% change in price
In a linear demand curve what happens to total revenue as price increases
Total revenue rises and when revenue falls, demand is elastic
What are substitutes
Goods and services that can be used for the same purpose
What are compliments
Goods and services that are used together
What is cross price elasticity of demand
Measures the strength of substitutes or compliment relationship between goods
