Flashcards in Reading 14 - Demand and Supply Analysis Deck (14):
measure of the responsiveness of the quantity demanded to a change in price. It is calculated as the ratio of the percentage change in quantity demanded to a percentage change in price.
perfectly elastic demand
Elasticity where at any higher price, quantity demanded decreases to zero
perfectly inelastic demand
Elasticity where a change in price has no effect on quantity demanded.
What are cases for goods that have inelastic demand?
When there are few or no good substitutes for a good, such as a life saving drug.
What are cases for goods that have elastic demand?
When one or more goods are very good substitutes for the good in question.
Factors that affect elasticity
- Quality and availability of substitutes.
- Portion of income spent on a good
- Time, where the elasticity of demand increases as time passes since the price change.
Point in the demand curve where elasticity = -1. It is were total revenue (price*quantity) is maximized. An increase in price moves us into the high elasticity region. A decrease in price moves us into the low elasticity region.
Income elasticity of demand
The sensitivity of quantity demanded to a change in income. Measured by taking the ratio of the percentage change in quantity demanded to the percentage change in income.
Sign of income elasticity for most goods.
Goods for which income elasticity is positive, where an increase in income leads to an increase in the quantity demanded for that good.
Goods for which income elasticity is negative, where an increase in income leads to a decrease in the quantity demanded for that good.
Cross price elasticity of demand
The ratio of the percentage change in the quantity demanded of a good to the percentage change in the price of a related good.
When an increase in the price of a related good increases demand for a good, The cross price elasticity of demand for these goods is positive.