Elasticities

These flashcards cover key terms and concepts related to elasticity in economics, including definitions, calculations, and examples.

Elasticity

The responsiveness of quantity supplied (Qs) or quantity demanded (Qd) to a determinant of Qs or Qd.

Price Elasticity of Supply (εs)

Calculated as (% ∆ in Qs)/(% ∆ in P), it measures how sensitive sellers are to price changes.

Price Elasticity of Demand (εd)

Calculated as (% ∆ in Qd)/(% ∆ in P), it measures how sensitive buyers are to price changes.

Midpoint Method

A method to calculate % ∆, given by (Start value - End value) / Midpoint between Start and End values.

Substitutes in Demand

Goods for which an increase in the price of one leads to an increase in demand for the other, indicating higher elasticity.

Necessity vs. Luxury

Necessities (e.g., insulin) have low elasticity due to few substitutes, while luxuries (e.g., cruises) have higher elasticity due to many substitutes.

Long Run vs. Short Run in Supply Elasticity

In the long run, easier to adapt increases elasticity, while in the short run, it's more inelastic due to fewer substitutes.

Types of Demand Curves: Perfectly Inelastic

When (% ∆ in P) > (% ∆ in Qd) = 0; buyers are not sensitive to price changes.

Types of Demand Curves: Inelastic

When (% ∆ in P) > (% ∆ in Qd); buyers are not very sensitive to price changes (εd < 1).

Types of Demand Curves: Unit Elastic

When (% ∆ in P) = (% ∆ in Qd); buyers respond in step with price changes (εd = 1).

Types of Demand Curves: Elastic

When (% ∆ in P) < (% ∆ in Qd); buyers are very sensitive to price changes (εd > 1).

Types of Demand Curves: Perfectly Elastic

When (% ∆ in P (~0)) < (% ∆ in Qd); any price increase leads to demand dropping to zero (εd = infinity).

Revenue Changes with Elasticity

If demand is elastic (εd > 1), raising price decreases revenue, while lowering price increases revenue.

Types of Supply Curves: Perfectly Inelastic

When (% ∆ in P) > (% ∆ in Qs) = 0; sellers are not sensitive to price changes.

Types of Supply Curves: Inelastic

When (% ∆ in P) > (% ∆ in Qs); sellers are not very sensitive to price changes (εs < 1).

Types of Supply Curves: Unit Elastic

When (% ∆ in P) = (% ∆ in Qs); sellers respond in step with price changes (εs = 1).

Types of Supply Curves: Elastic

When (% ∆ in P) < (% ∆ in Qs); sellers are very sensitive to price changes (εs > 1).

Income Elasticity of Demand

The responsiveness of quantity demanded (Qd) to changes in income; normal goods have positive elasticity and inferior goods have negative elasticity.

Cross-Price Elasticity of Demand

The responsiveness of quantity demanded of Good 'a' to changes in the price of Good 'b'; positive for substitutes and negative for complements. (% ∆Qda / % ∆Pb)