Chapter 5 - Elasticity

how much an object reacts to a force; if it reacts a lot, it is elastic, and if it reacts little, it is inelastic.

What is the physics definition of elasticity?

measures how responsive one variable is to a change in another.

How is elasticity defined in economics?

how much the quantity demanded of a good responds to a change in its price.

What does price elasticity of demand measure?

occurs when the price elasticity of _______ is equal to ∞, meaning consumers will buy any quantity at a specific price.

What is perfectly elastic demand?

Examples of perfectly elastic demand.

• the market for an individual farmer's crop, where consumers will only buy at a set market price

• •Demand for individual shares of a stock

  •Demand for mortgages other financial instruments

  •Demand for foreign currency

  •Demand for certain commodities

At any price above the set price, quantity demanded drops to 0; at any price below, quantity demanded is unlimited.

What happens to quantity demanded in perfectly elastic demand when price changes?

occurs when the price elasticity of ______ is equal to 0, meaning quantity demanded remains constant regardless of price changes.

What is perfectly inelastic demand?

Examples of perfectly inelastic demand.

• •Lifesaving medications or procedures (insulin for diabetics, epinephrine for severe allergic reactions, emergency medical care)

• •Salt

• •Addictive substances (alcohol, cigarettes/vapes, narcotics)

• •Some utilities (water and power and trash)

• •Contacted purchases

occurs when the price elasticity of ______ is equal to ∞, meaning producers will supply any quantity at a specific price.

What is perfectly elastic supply?

Examples of perfectly elastic supply.

• market for coffee in Denmark, where Denmark cannot affect the price and will buy any quantity at the market price.

• Labor markets for small businesses

  In the long run many everyday consumer goods approach perfect elasticity

Perfectly inelastic supply occurs when the price elasticity of supply is equal to 0, meaning quantity supplied remains constant regardless of price changes.

What is perfectly inelastic supply?

Examples of perfectly inelastic supply.

• •Unique artwork

  •Land in desirable places

  •Tickets to one-time events

  •Radio spectrum

  •Certain markets with harvest quotas

In a market with elastic demand, the burden of the tax is primarily borne by producers as consumers are sensitive to price changes.

What is the effect of a tax on a market with elastic demand?

In a market with inelastic demand, consumers bear most of the tax burden since they are less sensitive to price changes.

What is the effect of a tax on a market with inelastic demand?

What is income elasticity of demand?

measures how the quantity demanded of a good changes in response to a change in consumer income.

% change in quantity demanded

% change in income

What is cross-price elasticity of demand?

measures how the quantity demanded of one good changes in response to a change in the price of another good.

% change in quantity demanded of good A

% change in price of good B

What is wage elasticity of labor supply?

measures how the quantity of labor supplied changes in response to a change in wages.

% change to quantity of labor supply

% change in wage

What is elasticity of savings?

measures how the amount saved changes in response to changes in income or interest rates.

% change in savings

% change in interest rates

What is the relationship between elasticity and slope?

Elasticity measures responsiveness and can differ from slope; a steep slope indicates inelasticity, while a flat slope indicates elasticity.

E_d = Formula

- %change in Q^d

%change in P

Elastic

Inelastic

Unit Elastic(unitary)

E_d>1 = __________

E_d<1 = __________

E_d=1 = __________

Qd2-Qd1 (Qd2+Qd1)/2

Qs2-Qs1 (Qs2+Qs1)/2

%change in Q^{d &} %change in Q^s Formula

P₂-P₁

(P₂+P₁)/2

%change in P Formula

E_s = Formula

%change in Q^s

%change in P

Elastic

Inelastic

Unit Elastic(unitary)

E_s>1 = __________

E_s<1 = __________

E_s=1 = __________

the percentage change in quantity supplied divided by the percentage in price

What is the Price Elasticity of Supply

Horizontal

Perfective Elastic Demand & Supply are represented on a graph as a _______ line

—> Price no change

—> Quantity increases

Perfectly Elastic Demand

Supply Increases

—> Price no change

—> Quantity decreases

Perfectly Elastic Demand

Supply decreases

—> Price decreases

—> Quantity decreases

Perfectly Elastic Demand

Demand Decreases

—> Price increases

—> Quantity increases

Perfectly Elastic Demand

Demand Increases

—> Price no change

—> Quantity decreases

Perfectly Elastic Supply

Demand Decreases

—> Price no change

—> Quantity increases

Perfectly Elastic Supply

Demand Increases

—> Price decreases

—> Quantity increases

Perfectly Elastic Supply

Supply Increases

—> Price increases

—> Quantity decreases

Perfectly Elastic Supply

Supply Decreases

Vertical

Perfective INElastic Demand & Supply are represented on a graph as a _______ line

—> Price decreases

—> Quantity no change

Perfectly Inelasitc Demand

Supply Increases

—> Price increases

—> Quantity no change

Perfectly Inelasitc Demand

Supply Decreases

—> Price increases

—> Quantity increases

Perfectly Inelasitc Demand

Demand Increases

—> Price decreases

—> Quantity decreases

Perfectly Inelastic Demand

Demand Decreases

—> Price increases

—> Quantity no change

Perfectly InelasticSupply

Demand Increases

—> Price decreases

—> Quantity no change

Perfectly InelasticSupply

Demand Decreases

—> Price decreases

—> Quantity increases

Perfectly InelasticSupply

Supply Increases

—> Price increases

—> Quantity decreases

Perfectly InelasticSupply

Supply Decreases

Normal Goods/ Positive

Goods (or services) where there is a positive relationship between income. Income Elasticity of demand is ________

Inferior Goods/Negative

Goods (or services) where there is an inverse relationship between Income. Income elasticity of demand is _______

positive

Substitutes: ________ cross price elasticity

negative

Complements: ________ cross price elasticity