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Flashcards covering extensions of demand and supply analysis.
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Price elasticity of demand
Measures the responsiveness of quantity demanded to changes in price and helps suppliers in decision-making.
Modest changes in P cause very large changes in Qd
Relatively elastic
Substantial changes in P cause small changes in Qd
Relatively inelastic
Midpoint formula
It averages the two prices and the two quantities as the reference points to compute percentages.
Elastic demand
When %ΔQ > %ΔP
Inelastic demand
When %ΔQ < %ΔP
Unit elasticity
%ΔQ = %ΔP
Perfectly inelastic demand
%ΔQ=0
Perfectly elastic demand
%ΔP=0
Total revenue
Price (P) of product times quantity demanded (Qd)
Inelastic
Changes in P, “direct changes in TR
Elastic
Changes in Q, “direct changes in TR
Unit elastic
TR remains the same
Substitutability
The larger the number of substitute goods available, the greater the Ed, ceteris paribus.
Proportion of income
The higher the price of a good relative to consumers’ incomes, the greater Ed, ceteris paribus.
Luxuries versus necessities
The more a good is considered to be a ‘luxury rather than a ‘necessity’, the greater is the Ed.
Time
Product demand is more elastic the longer the time period under consideration.
Price elasticity of supply
Measuring responsiveness (sensitivity) of producers to price changes.
Relatively elastic
Modest changes in P cause very large changes in Qs
Relatively inelastic
Substantial changes in P cause small changes in Qs
Perfectly inelastic
Not enough time to shift resources
Inelastic supply
Resources not easily shifted to alternative uses
Relatively elastic
Resources easily shifted to alternative uses
Cross-elasticity of demand
measures how sensitive consumer purchases of one product (say X) are to a change in the price of some other product (say Y).
Substitute goods
Two different types of cool drinks
Substitute goods
↑ price of Y ↓ Qd of Y ↑ Qd of X
Complementary goods
↑ price of Y ↓ Qd of Y ↓ Qd of X
Independent goods
↑ price of Y ↓ Qd of Y Qd of X = 0
Income elasticity of demand
Measures the degree to which consumers respond to a change in their incomes by buying more or less of a particular good.
Normal goods
↑ income ↑ Qd of X
Inferior goods
↑ income ↓ Qd of X
Consumer surplus
The benefit surplus received by a consumer or consumers in a market
Producer surplus
The benefit surplus received by a producer or producers in a market
Efficiency losses
The reductions of combined CS and PS associated with underproduction or overproduction of a product.