Economics Chapter 4: Elasticity

What is the price elasticity of demand?

It measures responsiveness of quantity demanded to change in price.

What is elasticity?

It measures how sensitive quantity demanded is to a change in price

What is inelastic demand?

When the price goes up or down, quantity demanded only changes a little bit. You get in your car and get gas you don't drive around wasting it.

Is quantity demand insensitive to a change in price with an inelastic product?

Yes, when there is a decrease in price only a little increase in quantity demanded.

Why are inelastic products insensitive to changes in price?

Because there are few substitutes. Usually they are necessities

What is the elasticity of demand coefficient?

% Change in Quantity / % change in price = Elasticity of demand coefficient. When there is a small change in quantity and big change in price the NUMBER IS LESS THEN ONE.

For inelastic products, is quantity sensitive to price?

No, it is not sensitive to price.

For elastic products is quantity sensitive to price?

Yes, it is very sensitive to price.

When price goes down for elastic products, what happens to the quantity?

It increases a lot because they are sensitive to each other.

What is a product elastic?

Because there is a lot of substitutes or they are luxurious or THEY HAVE A ELASTICITY COEFFICIENT GREATER THEN ONE.

For elastic products.. Will a change in price effect the quantity ?

Yes, in a very big way a whole lot!

What is unit elastic and how do we get it?

When the percentage change in quantity is equal to the percentage change in price. This will be shown when we get a 1 using the elasticity coefficient

What does a 1 mean using the elasticity coefficient?

It means we have unit elastic demand

What does perfect inelastic mean?

It means that a change in price has no effect on quantity.

How do we show perfect inelasticity?

When we use the elasticity coefficient and we can see that the change in price has 0 effect on the quantity. 0/ % change in price = 0

What does perfectly elastic mean?

It means that the demand curve is horizontal and that when a firm changes price then no one will buy.

How do we show perfectly elastic?

When we use the elasticity coefficient and we get a infinite number.

What are the different kinds of elasticity?

Perfectly inelastic, realitivly inelastic, unit elastic, realitivily elastic, perfectly elastic

The more substitutes a product has and the more sensitive it is to price changes what is shown on the coefficient?

The great elasticity demand coefficient

What is the total revenue test?

It tells you what happens to total revenues when there is a change in price if the demand curve is elastic or inelastic. It is quantity X Price

What happens for inelastic product's total revenue when price...

a) Goes up

b) Goes down

a) If the price goes up the total revenue goes up but

b) If the price goes down then the total revenue goes down as well.

Why don't gas stations have deals on gas?

Because gas in a inelastic product where their total revenue would also decrease if the price went down.

What happens to a elastic product's total revenue..

a) Price goes up

b) Price goes down

a) When the price goes up less people will want to buy it and the total revenue will decrease

b) If the price goes down more people will want to buy it so the total revenue will expand.

Why do clothing stores have deals all the time?

Because they are elastic products and if they lower their prices then they will have more total revenue.

If price goes up and total revenue goes down what must be true?

The good is elastic.

What does the elasticity of demand depend on? (3)

1) The closeness of substitutes: The closer the substitutes for a good yield higher elasticity. Products with little substitutes are inelastic

2) Proportion of income spent on goods: greater proportion of income sent on a good means high elasticity

3) Time elapsed since price change: longer time lapse means high elasticity.

What does short run demand describe?

The responsiveness to a change in price before there is sufficient time for all substitutions to be made. Less elastic then long run

What does long run demand describe?

the responsiveness to a change in price after there is sufficient time for all substitutions to be made.

What is the cross elasticity of demand?

Measures the responsiveness of quantity demanded of good A to a change in the price of good B. % Change of quantity demanded good A / % price change of good B.

What does the cross elasticity of these suggest?

a) # > 0

b) # = 0

c) # < 0

a) Goods are substitues

b) Goods are independent

c) Goods are complements

What is income elasticity of demand? What is the formula?

It measures the responsiveness of demand to a change in income. % of change in quantity demanded / % change in income.

What does income elasticity of demand suggest?

a) # > 1

b) # = 1

c) #

a) Income elastic (normal good)

b) Income inelastic (normal good)

c) Negative income elasticity (inferior good)

What is the elasticity of supply?

Measures responsiveness of quantity supplied to a change in price. % Change in quantity supplied / % change in price.

What does the elasticity of supply suggest?

a)# = Infinity

b)1 < # < infinity

c) # = 1

d) 0 < # < 1

e) # = 0

a) Perfectly elastic (horizontal)

b) Elastic

c) unit elastic

d) inelastic

e) perfectly inelastic (vertical)

Elasticity of supply depends on what 2 factors?

1) Resources substitution possibilities: The more common the productive resources used the higher #

2) Time frame for supply decision: The longer time elapsed from momentary to short run to long run supply the higher the #

What does each of these describe?

a) Momentary supply

b) Short run supply

c) Long run supply

a) Responsiveness of quantity supplied immediately following a price change

b) Responsiveness of quantity supplied to a price change when some technologically possible adjustments to production have been made

c) Responsiveness of quantity supplied to a price change when all technological possible adjustments to production have been made.