Ch 5 | Elasticity
Call Kai
Learn
Practice Test
Spaced Repetition
Match
Flashcards
Knowt Play1/98
There's no tags or description
Looks like no tags are added yet.
99 Terms
What is price elasticity of demand?
How responsive quantity demanded is to a change in price
What is the price elasticity of demand formula?
Ed = |% change in quantity demanded ÷ % change in price|.
What does elastic demand mean?
Quantity demanded changes by a larger percentage than price; Ed > 1.
What does inelastic demand mean?
Quantity demanded changes by a smaller percentage than price; Ed < 1.
What is unit elastic demand?
Quantity demanded and price change by equal percentages; Ed = 1.
What is perfectly inelastic demand?
Quantity demanded does not change when price changes; Ed = 0.
What is perfectly elastic demand?
Demand is infinitely responsive to price; Ed = infinity.
What shape is a perfectly inelastic demand curve?
Vertical.
What shape is a perfectly elastic demand curve?
Horizontal.
What elasticity value indicates elastic demand?
Ed > 1.
What elasticity value indicates inelastic demand?
0 < Ed < 1.
Why is insulin an example of inelastic demand?
It is medically necessary and has few close substitutes.
Why are earbuds an example of elastic demand?
Buyers can easily switch to other brands or products.
What are the three main determinants of demand elasticity?
Substitutes, time to adjust, and proportion of income spent.
How do more available substitutes affect demand elasticity?
They make demand more elastic.
How does more time to adjust affect demand elasticity?
Demand generally becomes more elastic.
How does spending a larger share of income affect elasticity?
It generally makes demand more elastic.
What does high willingness to shop elsewhere suggest?
Elastic demand.
What does low willingness to shop elsewhere suggest?
Inelastic demand.
Why is elasticity different from demand curve slope?
Elasticity uses percentage changes, while slope uses absolute changes.
Can elasticity change along a straight-line demand curve?
Yes. It changes even when the slope stays constant.
What is the midpoint formula for price elasticity?
Ed = |[(Q2−Q1)/((Q1+Q2)/2)] ÷ [(P2−P1)/((P1+P2)/2)]|.
Why use the midpoint formula?
It gives the same elasticity when moving between two points in either direction.
What does Q1 represent in the midpoint formula?
Original quantity.
What does Q2 represent in the midpoint formula?
New quantity.
What do P1 and P2 represent?
Original price and new price.
Why is the negative sign ignored for price elasticity of demand?
Demand elasticity is conventionally reported as a positive magnitude.
Price rises 10%, quantity demanded falls 20%. What is Ed?
2; elastic demand.
Price rises 10%, quantity demanded falls 5%. What is Ed?
0.5; inelastic demand.
Price rises 10%, quantity demanded falls 10%. What is Ed?
1; unit elastic demand.
What is total revenue?
The total money a business receives from sales.
What is the total revenue formula?
TR = Price × Quantity sold.
What happens to revenue if price rises with elastic demand?
Total revenue decreases.
What happens to revenue if price falls with elastic demand?
Total revenue increases.
What happens to revenue if price rises with inelastic demand?
Total revenue increases.
What happens to revenue if price falls with inelastic demand?
Total revenue decreases.
How do price and revenue move under elastic demand?
In opposite directions.
How do price and revenue move under inelastic demand?
In the same direction.
What happens to revenue along a unit-elastic demand curve?
It remains constant when price changes.
How should a business increase revenue with elastic demand?
Lower its price.
How should a business increase revenue with inelastic demand?
Raise its price.
Where is demand elastic on a straight-line demand curve?
On the upper portion.
Where is demand inelastic on a straight-line demand curve
On the lower portion.
Where is demand unit elastic on a straight-line demand curve?
At the midpoint.
Where is total revenue maximized on a straight-line demand curve?
At the midpoint, where Ed = 1.
What happens to revenue as price falls along a straight-line demand curve?
It first increases, reaches a maximum, then decreases.
Why might movie theatres charge high popcorn prices?
Limited alternatives can make demand relatively inelastic.
What is price elasticity of supply?
How responsive quantity supplied is to a change in price.
What is the price elasticity of supply formula?
Es = % change in quantity supplied ÷ % change in price.
What does elastic supply mean?
Quantity supplied responds proportionally more than price; Es > 1.
What does inelastic supply mean?
Quantity supplied responds proportionally less than price; Es < 1.
What is unit elastic supply?
Quantity supplied and price change by equal percentages; Es = 1.
What is perfectly inelastic supply?
Quantity supplied does not respond to price changes; Es = 0.
What is perfectly elastic supply?
Quantity supplied is infinitely responsive to price; Es = infinity.
What shape is a perfectly inelastic supply curve?
Vertical.
What shape is a perfectly elastic supply curve?
Horizontal.
What makes supply more elastic?
Easy, inexpensive, and quick increases in production.
What makes supply more inelastic?
Difficult, expensive, or time-consuming production increases.
Why is mined gold an example of inelastic supply?
Increasing production is difficult, costly, and time-consuming.
Why are snow-shoveling services an example of elastic supply?
Additional services can be supplied relatively quickly and easily.
How does greater input availability affect supply elasticity?
It makes supply more elastic.
How does a shorter production time affect supply elasticity?
It makes supply more elastic.
Why do businesses study supply elasticity?
To predict output and price responses and plan production.
What is cross-price elasticity of demand?
How demand for one good responds to a change in another good's price.
What is the cross-price elasticity formula?
Exy = % change in quantity demanded of X ÷ % change in price of Y.
What sign indicates substitute goods?
Positive cross-price elasticity.
What sign indicates complementary goods?
Negative cross-price elasticity.
What are substitute goods?
Products consumers can use in place of one another.
What are complementary goods?
Products commonly used together.
What happens to demand for a substitute when another good's price rises?
Demand for the substitute increases.
What happens to demand for a complement when another good's price rises?
Demand for the complement decreases.
What happens to a substitute's demand curve when demand increases?
It shifts right.
What happens to a complement's demand curve when demand decreases?
It shifts left.
What does a larger positive cross-price elasticity indicate?
The goods are closer substitutes.
What does a larger absolute negative cross-price elasticity indicate?
A stronger complementary relationship.
What does cross-price elasticity of zero suggest?
The goods are unrelated or have little relationship.
What is income elasticity of demand?
How responsive demand is to a change in consumer income.
What is the income elasticity formula?
Ey = % change in quantity demanded ÷ % change in income.
What sign of income elasticity indicates a normal good?
Positive.
What sign of income elasticity indicates an inferior good?
Negative.
What is a normal good?
A good whose demand increases when income increases.
What is an inferior good?
A good whose demand decreases when income increases.
How does rising income shift demand for normal goods?
To the right.
How does rising income shift demand for inferior goods?
To the left.
What is income-inelastic demand for a normal good?
Income elasticity between 0 and 1; typically a necessity.
What is income-elastic demand for a normal good?
Income elasticity greater than 1; typically a luxury.
How do necessities respond to rising income?
Quantity demanded rises proportionally less than income.
How do luxuries respond to rising income?
Quantity demanded rises proportionally more than income.
What is tax incidence?
The division of a tax burden between buyers and sellers.
What determines tax incidence?
The relative price elasticities of demand and supply.
Who bears more tax when demand is relatively inelastic?
Buyers.
Who bears more tax when supply is relatively inelastic?
Sellers.
Who bears more tax when demand is more elastic than supply?
Sellers.
Who bears more tax when supply is more elastic than demand?
Buyers.
Who bears all the tax when demand is perfectly inelastic?
Buyers.
Who bears all the tax when demand is perfectly elastic?
Sellers.
Who bears all the tax when supply is perfectly inelastic?
Sellers.
Who bears all the tax when supply is perfectly elastic?
Buyers.
Why might governments tax goods with inelastic demand and supply?
Quantity traded falls less, potentially generating greater tax revenue.