Flashcards in Microeconomics - L3 - Elasticity Deck (14):

1

## Elasticity definition

### The responsiveness of demand or supply to one of its determinants.

2

## Price elasticity of demand

###
The responsiveness of demand to a change in price

Change in QD/Change in Price

OR

(%Change in QD)/(%Change in price)

Expected sign is negative (Increase in price will lead to a decrease in demand)

3

## Elasticity number interpretation

###
If Number >1, then Elastic (1%change in price will lead to more than 1% decrease in QD)

If number <1, then Inelastic (1%change in price will lead to less than 1% decrease in QD)

4

## Determinants of Price elasticity of Demand

###
Substitute goods - The easier they are found, the more elastic

Income allocation - More income spent on goods, the more elastic

Type of good - Necessities are less influenced by price than luxury

Time period considered - Goods tend to be more elastic over time

5

## Total Consumer Expenditure

###
Total consumer expenditure is equal to firms total revenue

Calculation (PxQ)

The more elastic the demand, the more TE will fall as price rises

6

## Arc Elasticity Calculation

###
The measurement of elasticity between two points on a curve. We use the PEDemand formula for this calculation.

Find elasticity (%Change in demand/%Change in Price), then use the midpoint method:

Change in Q. /. Change in P

—————. ——————-

Midpoint Q. Midpoint P

7

## Price elasticity of supply definition

### A measure of the change in supply in response to a change in price.

8

## Price elasticity of Supply determinants

###
Ultimately, we are looking at how easily a supplier could boost supply.

Spare capacity of producers - empty farms or production machines

Stock level - availability of excess stock

Costs vs benefits - turning on extra machines cost vs potential profit

9

## Income elasticity of Demand definition

### The responsiveness of demand to the percentage change in income

10

## Income of elasticity calculation

###
%Change in Demand/Demand

/

%Change in income/Income

11

## Income elasticity of Demand determinants

###
Degree of necessity

Proportion of income spent on the good

Normal good vs Inferior good

12

## Cross price elasticity of Demand definition & calculation

###
Responsiveness of demand for product A to the % price change in product B

%change in QD for product A/Quantity demanded for product A

Divided by

%change in price for product B/Price of product B

Determinants - closeness as substitutes or compliments

13

## Long term elasticity rule

### The longer the time period considered, the more elastic supply and demand are as both suppliers and consumers have more time to adapt to the change

14