Test 2 - Market Efficiency and Elasticity Flashcards
What is Elasticity of Demand?
Elasticity of demand refers to the responsiveness of the change in quantity demanded in relation to (change in) price. Demand Curve
What is elastic demand?
Elastic demand occurs when the change in a product’s quantity demanded is proportionally greater than a change in price. It is usually represented by a “flatter” demand curve.
What is inelastic demand?
Inelastic demand occurs when the change in a product’s quantity demanded is proportionally less than a change in price. It is usually represented by a “taller” supply curve with an I shape.
Determinants of Price Elasticity of Demand (PED)
- The availability of substitutes
- Whether it is a luxury or necessity
- Time (In the short term, products are more inelastic; over time more elastic because more substitutes are found.
- Proportion of Income spent (a good that was a lower proportion of income tends to be inelastic).
What is Perfect Inelastic demand?
If a change in price results in no change to quantity demanded, the Coefficient = 0 (perfectly inelastic)
What is Perfect Elastic demand?
If a change in price results in infinitely large change in quantity demanded, the ED = ∞ (perfectly elastic)
What is Unitary Elasticity of demand?
When the coefficient is 1, it is called Unitary Elasticity. Price change is proportional to Quantity demanded change.
What coefficient range is relatively inelastic in demand?
Less than 1
What coefficient range is relatively elastic in demand?
More than 1
How to calculate PED?
percent change in quantity / percent change in price
Change in Quantity x Original Price / Original Quantity x Change in Price
How is the Mid-Point method different to point method of demand?
The mid-point method is very similar to the point methods. The only difference is, instead of using the original price, we use the average price. Instead of using the original quantity, we use the average quantity.
What is Total Revenue (TR), Formula
Total Revenue refers to the total amount of income business or firms gain from selling a good or service. TR = P x QD
Does a Business want to sell more demand elastic or demand inelastic goods? How does this affect Total Revenue?
A business wants to sell more inelastic goods. This means that consumers will not react as much to an increase in price. This will increase revenue and profit.
What is Price Elasticity of Supply?
The responsiveness of the quantity supplied of a good or service by producers to a change in the good or service’s prices. Supply of curve
What can producers do if supply of a product is inelastic; elastic?
If supply is inelastic, producers will struggle to change production in a given time. If supply is elastic, producers can increase output without a rise in cost or a time delay.
If price is elastic >1, what is the effect on suppliers and what is an example of a supply elastic good?
Sellers are sensitive to a price change, Manufactured goods.
If price is inelastic <1, what is the effect on suppliers and what is an example of a supply inelastic good?
Sellers are not sensitive to a price change, Agricultural goods.
Unitary Supply Elasticity?
Unitary Supply of Elasticity is 1. Price and Quantity supplied change is exactly the same proportion.
Perfect Supply Inelastic and what is an example of a perfectly supply inelastic good.
A change in price has no effect on quantity supplied. Rare, valuable 1:1 goods.
Determinants of Price Elasticity of Supply
- Ability to store inventory
- Nature of industry
- Time
Time Determinant
If the producer can respond quickly to a price change, then supply will be price elastic. If inventories are low, this may be hard to do. As time increases the supply of goods tend to become more elastic due to an increase in the factors of production
Nature of Industry Determinant
The supply of agricultural products is quite inelastic, while the supply of manufactured goods is usually more elastic. Agricultural products take a long time to produce, they cannot respond quickly to price changes. Manufactured goods on the other hand are relatively easy to produce and can make changes to production faster.
Ability to store inventory determinant.
Inventories refer to stocks that a producer keeps stored for future sales. If a producer has the ability to store its goods, then it can respond fairly quickly to a change in demand (price) and so supply would be elastic.
Price Discrimination and how can businesses use this tactic?
Different consumer groups have different price elasticity of demand for the same products. Businesses can use this information to charge different prices and increase their total revenue.
