Elasticity

Flashcards reviewing the concept of elasticity in economics, covering price elasticity of demand and supply, income elasticity, and cross-price elasticity.

Elasticity

Measures the responsiveness of quantity demanded or quantity supplied to changes in its determinants.

Price Elasticity of Demand

How much the quantity demanded of a good responds to a change in the price of that good; how price-sensitive buyers are for that good. Calculated as percentage change in quantity demanded divided by percentage change in price.

Midpoint Method

Used to calculate elasticity to make the price elasticity positive.

Higher Price Elasticity

Quantity demanded is more responsive to changes in the price.

Luxury Goods

Price elasticity is higher for these.

Narrowly

Price elasticity is higher when goods are defined this way.

Close Substitutes

Price elasticity is higher when these are available.

Price Elasticity in the Long Run

Price elasticity is higher in the long run because people can change behavior more over time.

Demand Curve Shape and Elasticity

The flatter the demand curve, the greater the price elasticity of demand.

Perfectly Inelastic Demand

e=0; vertical demand curve.

Inelastic Demand

e<1; relatively steep demand curve.

Unit Elastic Demand

e=1; intermediate slope demand curve.

Elastic Demand

e>1; relatively flat demand curve.

Perfectly Elastic Demand

e=∞; horizontal demand curve.

Price Increase Effects on Revenue

A price increase has two effects on revenue: Higher revenue because of the higher price and lower revenue because you sell fewer units. Depends on the price elasticity of demand.

Price Elasticity and Total Revenue (Elastic)

If demand is elastic (E > 1), total revenue decreases because the fall in revenue from lower quantity is greater than the increase in revenue from higher price.

Price Elasticity and Total Revenue (Inelastic)

If demand is inelastic (E < 1), total revenue increases because the fall in revenue from lower quantity is less than the increase in revenue from higher price.

Price Elasticity of Supply

How much the quantity supplied of a good responds to a change in the price of that good; how price-sensitive suppliers are for that good. Calculated as percentage change in quantity supplied divided by percentage change in price.

Supply Curve Shape and Elasticity

The flatter the supply curve, the greater the price elasticity of supply.

Perfectly Inelastic Supply

e=0; vertical supply curve; sellers' price sensitivity is none.

Inelastic Supply

e<1; relatively steep supply curve; sellers' price sensitivity is relatively low.

Unit Elastic Supply

e=1; intermediate slope supply curve; sellers' price sensitivity is intermediate.

Elastic Supply

e>1; relatively flat supply curve; sellers' price sensitivity is relatively high.

Perfectly Elastic Supply

e=infinity; horizontal supply curve; sellers' price sensitivity is extreme.

Econometrics

The study of using data to answer questions related to economics.

Income Elasticity of Demand

How much the quantity demanded of a good responds to a change in the income of consumers. Calculated as percentage change in quantity demanded divided by percentage change in income.

Normal Goods

Income elasticity > 0

Inferior Goods

Income elasticity < 0

Cross-Price Elasticity of Demand

How much the quantity demanded of a good responds to a change in the price of another good. Calculated as percentage change in quantity demanded of good 1 divided by percentage change in price of good 2.

Substitutes

Cross-price elasticity > 0

Complements

Cross-price elasticity < 0