Flashcards in Week 3 - elasticity Deck (19)

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1

## define elasticity

### Elasticity = A measure of responsiveness of quantity demanded or quantity supplied to one of it’s determinates

2

## Define price elasticity of demand

###
Price elasticity of demand = A measure of how much the quantity demanded of a good responds to a change in the price of that good, calculated as a percentage

Price elasticity of demand = % change in quantity demanded / %change in price

3

## price elasticity of demand formala

###
Price elasticity of demand = % change in quantity demanded / %change in price

The midpoint formula is preferable when calculating the price elasticity of demand because it gives the same answer regardless of the direction of the change.

(Q2 – Q1)/[(Q2 + Q1)/2] Price elasticity of demand = (P2 – P1)/[(P2 + P1)/2]

*page 99*

4

## Price elasticty of demand determinants

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1. Availability of close substitutes (many goods = elastic)

2. Necessities V luxuries (necessities = inelastic demand, luxury = elastic)

3. Definition of the market – ‘how we draw the boundaries of the market’ board category = inelastic demand, narrow category (many close substitutes) = elastic demand / Wide market = less elastic

4. Time horizon = longer time = more elastic = short term = inelastic

5

## Define total revenue

###
The amount paid by buyers and received by sellers of a good calculated as the price of the good X quantity sold

•

With an inelastic demand curve, an increase in price leads to a decrease in quantity that is proportionately smaller. Thus, total revenue increases.

TR = P x Q

6

## type of demand curves

###
elastic

inelastic

unit elastic

perfectly elastic

perfectly inelastic

7

## Define elastic curves

### When the elasticity is greater than 1, therefore quantity moves proportionally more than price (quantity demanded does respond strongly to a change in price)

8

## define inelastic demand curve

### When elasticity is less than 1 therefore, quantity moves proportionally less than price (Quantity demanded does not respond strongly to a change in price)

9

## explain unit elastic demand curve

### If elasticity is exactly 1 the percentage change in quantity equals the percentage change in price, this is called Unit elasticity

10

## Explain perfectly inelastic demand curve

### Perfect inelastic = quantity demanded does not respond to a change in price (demand curve is vertical)

11

## Explain perfectly elastic demand curve

### Perfectly elastic = occurs when price elasticity of demand approaches infinity and the demand curve becomes horizontal, reflecting the fact that a very small change in price will lead to large changes in quantity demanded

12

## Define income elasticity of demand and it's formula

###
Income elasticity of demand = Measure of how much the quantity demand of a good responds to a change in consumer income, calculated as a percentage change in quantity demanded divided by percentage change of income

%change in quantity demand / %change in income

Types of goods:

Normal goods

Inferior goods

o Higher income raises the quantity demanded for normal goods but lowers the quantity demanded for inferior goods. (look at slide 66 week 3*)

13

## Define cross price elasticity of demand

###
A measure of how much quantity demanded of one good responds to a change in price of another good.

Calculated: %change in quantity of good 1 / % change in price of good 2

14

## Define elasticity of supply

### A measure of how much the quantity supplied of a good responds to a change in the price of that good.

15

## Elasticity of supply formula

###

Price elasticity of supply = %change in quantity supplied / % change in price

16

## Determinates of elasticity of supply

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Ability of sellers to change the amount of the good they produce.

– Beach‐front land is inelastic.

– Books, cars, or manufactured goods are elastic.

• Time period – Supply is more elastic in the long run

17

## explain income elasticity of demand and goods

###
Higher income raises quantity demanded, because quantity demanded and income move in the same direction, normal goods have POSITIVE income elasiticites

inferior goods have Negative income elasticities

18

## Cross price elasticity of demand formula

###
%chnage in QUANTITY of good 1 / % change in PRICE of good 2

substitutes will likely be Positive

Complements will be negative (page 104)

19