Elasticity and its Application Flashcards
(15 cards)
What does elasticity allow us to analyze in economics?
It allows for greater precision in understanding how buyers and sellers respond to changes in market conditions.
What is the price elasticity of demand?
A measure of how much the quantity demanded responds to a change in price, indicating the price sensitivity of buyers’ demand.
Define elastic demand.
When the quantity demanded responds substantially to changes in price.
Define inelastic demand.
When the quantity demanded responds only slightly to changes in price.
What factors determine the price elasticity of demand?
- Availability of close substitutes
Necessities vs. luxuries
Definition of the market
Proportion of income devoted to the product
Time horizon
How is price elasticity of demand computed?
Price elasticity of demand = Percentage change in quantity demanded / Percentage change in price.
What is an example calculation for price elasticity of demand?
If a 10% increase in ice cream cornet prices causes a 20% decrease in quantity purchased, then: Price elasticity of demand = 20% / 10% = 2 (absolute value).
What is the midpoint method used for?
To calculate price elasticity between two points on a demand curve, ensuring consistent results regardless of direction.
What is total expenditure?
The amount paid by buyers, calculated as the price times the quantity purchased.
What is total revenue?
The amount received by sellers, calculated as the price times the quantity sold.
Define income elasticity of demand.
Measures how quantity demanded changes as consumer income changes; calculated as: Income elasticity = Percentage change in quantity demanded / Percentage change in income.
Differentiate between normal and inferior goods based on income elasticity.
- Normal goods have positive income elasticity (higher income raises quantity demanded).
Inferior goods have negative income elasticity (higher income lowers quantity demanded).
What is cross-price elasticity of demand?
Measures how the quantity demanded of one good changes as the price of another good changes; calculated as: Cross-price elasticity = Percentage change in quantity demanded of good 1 / Percentage change in price of good 2.
How does supply react to changes in price according to its elasticity?
Elastic supply means that quantity supplied responds substantially to changes in price, while inelastic supply means it responds only slightly.
How do you compute the price elasticity of supply?
Price elasticity of supply = Percentage change in quantity supplied / Percentage change in price.
