ECON 2010: Chapter 5
33 Cards in this Set
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Elasticity
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a measure of how much one economic variable responds to changes in another economic variable
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Price elasticity of demand (Ed) equation
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elastic vs. inelastic demand
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elastic = quantity demanded responds substantially to changes in price
inelastic = quantity demanded responds only slightly to changes in price
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Determinants of elasticity of demand
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availability of close substitutes
necessities vs. luxuries
definition of the market
time horizon
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availability of close substitutes
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goods with close substitutes will have a more elastic demand
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necessities vs. luxuries
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necessities are more elastic
luxuries are more elastic
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definition of the market
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narrowly defined markets are more elastic
As definiton expands, there are more substitutes (i.e. more inelastic)
ex. breakfast cereal ---> breakfast foods
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time horizon
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demand is more elastic over longer time horizons
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Ed > 1
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Demand is elastic
Qd responds more than proportionally to a change in P
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Ed = 1
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Demand is unit elastic
Qd responds exactly proportionally to a change in P
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0 < or equal to Ed < 1
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Demand is inelastic
Qd responds less than proportionally to a change in P
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Ed = 0
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demand is perfectly inelastic
Qd does not respond at all to a change in P
ex: air
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Ed = infinity
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demand is perfectly elastic
Qd responds completely to a change in P
ex: Exactly the same good sold for two different prices
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Total Revenue (TR)
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The amount paid by buyers and received by sellers for a good or service
Tr = P x Q
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Total Revenue & Elasticity
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If demand is inelastic, total revenue increase with an increase in price
If demand is elastic, total revenue decreases with an increase in price
note: if Ed = 1, then total revenue remains constant when there is a price change
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Linear Demand Curve
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Constant slope
Different price elasticities
Points with low price and high quantity demand --> inelastic demand
Points with high price and low quantity demand --> elastic demand
Elasticity decreases (i.e. becomes smaller in magnitude and more elastic) as we move down the demand curve,…
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Linear demand curve
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Income Elasticity of Demand (Ey)
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How much quantity demanded changes due to a change in income
Can use the midpoint method - SIGN matters, so be consistent
Allows us to categorize goods into normal or inferior
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Income elasticity normal vs. inferior goods
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Normal goods
Ey > or equal to 0: as income goes up, you want more
Inferior goods
ey < 0: as income goes up you want less
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Income elasticity necessities vs. luxuries
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Necessities
0 < or equal to Ey < or equal to 1
Quantity demanded does not change very much when income increases
Luxuries
Ey > 1
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Cross-price Elasticity of Demand
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How much does the quantity demanded of some good, A, change when the price of another good, B, changes
SIGN matters (like income elasticity)
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Cross-price Elasticity of Demand equation
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Categorization of cross-price Elasticity of Demand
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Substitues: E > 0
Complements: E < 0
Unrelated: E = 0
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Price Elasticity of Supply
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The responsiveness of Qs to changes in own price
This is a measure of how sellers respond to changes in a goods price
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Determinants of Price Elasticity of Supply
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Time: supply is more elastic in the long-run
Fixed inputs
ex. champagne
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Price Elasticity of Supply equation
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Es > 1
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elastic supply
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Es = 1
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unit elastic supply
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0 < or equal to Es < 0
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inelastic supply
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Es = 0
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perfectly inelastic
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Es = infinity
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perfectly elastic
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Points with low price and low quantity supplied
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Points with low price and low quantity supplied
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Points with high price and high quantity supplied
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Inelastic supply
even as price increases, firms find it hard to increase due to capacity constraints
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ECON 2010: EXAM 1