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BUEC 503 > Module 4 > Flashcards

Module 4 Flashcards

1
Q

Is a flatter curve more or less elastic?

A

A flatter curve is more elastic.

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2
Q

What’s the difference between a perfectly elastic/inelastic curve and one that is just “elastic/inelastic”? What are the associated values of elasticity?

A

Perfectly elastic: horizontal, # = infinity
Perfectly inelastic: vertical, # = 0
Elastic: has a slope, #>1
Inelastic: has a slope, #<1

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3
Q

What is the basic formula for the price elasticity of demand?

A

% change in QD/ % change in P

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4
Q

What is the midpoint formula? (give the actual formula)

A
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5
Q

Is Price Elasticity of Demand negative or positive?

A

Negative because either the numerator or the denominator are always negative, and never both.

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6
Q

Is a PED of -3 considered greater or lesser than one of -2?

A

It’s considered greater. We compare absolute values.

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7
Q

Does elasticity stay the same along a linear “curve”?

A

No - it’s more elastic at the top, unit elastic at the midpoint, and inelastic at the bottom.

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8
Q

What does unit-elastic mean? What’s it’s value?

A

Unit elastic = -1 or 1, and it means that for every % change in P there’s an equal % change in QD or QS.

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9
Q

What’s the formula for Income Elasticity of Demand?

A

= %change QD/ %change income

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10
Q

What’s the formula for cross-price elasticity of demand?

A

= % change in QD (if it’s price stays the same) / % change in P (substitute or compliment)

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11
Q

What are the main causes of demand elasticity?

A
  • Availability of close substitutes
  • Passage of time
  • Luxury vs necessity
  • Definition of market
  • The share of the good in the consumer’s budget
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12
Q

How does the passage of time affect elasticity?

A

Everything is more elastic over time because people need time to adjust and make changes.

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13
Q

What are the values that tell us if something is a luxury vs a necessity?

A

Luxury:
10% ^ income = >10%^QD
IED >1
Neccesity:
10%^ income =<10%^QD
IED<1

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14
Q

How does the definition of the market affect elasticity?

A

A more broadly defined market will be more elastic because there’s more substitutes.

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15
Q

How does the share of a good in the consumer’s budget affect elasticity of demand?

A

If the good takes up a smaller share of the consumer’s budget, they will be less affected by price changes, so their elasticity will be lower.

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16
Q

How is total revenue affected by increasing price when demand is inelastic?

A

When demand is inelastic, increasing price increases revenue.

17
Q

How is total revenue affected by increasing price when demand is elastic?

A

When demand is elastic, increasing price decreases revenue.

18
Q

How is revenue affected by increasing price when demand is unit elastic?

A

When demand is unit elastic, increasing price won’t change overall revenue.

19
Q

How do we calculate the overall revenue change that occurs from a price change?

A

= Revenue gained - Revenue lost

20
Q

Where on the demand curve is revenue maximized based on elasticity?

A

Revenue is maximized at the point where demand becomes unit elastic.

21
Q

What are the three types of demand elasticity?

A

Price
Cross-price
Income

22
Q

What is the formula for the cross-price elasticity of demand?

A

***** % change in quantity assuming the price of the first good (numerator) stays the same.

23
Q

What does it mean if the cross-price elasticity of demand is positive?

A

If the cross price elasticity of demand is positive the goods are substitutes.

24
Q

What does it mean if the cross-price elasticity of demand is negative?

A

If the cross-price elasticity of demand is negative then the goods are compliments.

25
Q

What does it mean if the cross price elasticity of demand is equal to zero?

A

If the cross price elasticity of demand is equal to zero, the goods are not related.

26
Q

What is the formula for the income elasticity of demand?

A
27
Q

What tells us that a good is a luxury?

A

a) 10% increase in income = greater than 10% increase in QD
b) income elasticity will be positive
c) income elasticity will be greater than 1

28
Q

What tells us that a good is a necessity?

A

a) 10% increase in income = less than 10% increase in QD
b) income elasticity will be positive
c) income elasticity will be less than 1

29
Q

What tells us that a good is inferior?

A

a) QD falls when income increases
b) income elasticity will be a negative number.

30
Q

What is the formula for the price elasticity of supply?

A
31
Q

What affects the price elasticity of supply?

A
  • Ability and willingness of firms to alter production as price changes:
  • Time
  • Availability of inputs and their elasticity of supply

BUEC 503 (12 decks)

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