Microeconomics - L3 - Elasticity Flashcards Preview

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

Elasticity definition

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


Price elasticity of demand

The responsiveness of demand to a change in price

Change in QD/Change in Price


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

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


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)


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


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


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


Price elasticity of supply definition

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


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


Income elasticity of Demand definition

The responsiveness of demand to the percentage change in income


Income of elasticity calculation

%Change in Demand/Demand
%Change in income/Income


Income elasticity of Demand determinants

Degree of necessity
Proportion of income spent on the good
Normal good vs Inferior good


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


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


Important notes

Expected elasticity result for a normal product is negative (higher price will equal lower demand)