chapter 5 econ elasticity

What does elasticity measure?

How responsive quantity demanded (or supplied) is to a change in price.

Formula for price elasticity of demand (PED)?

: % change in quantity demanded ÷ % change in price.

Example of inelastic demand?

Insulin for diabetics — essential, few substitutes.

Example of elastic demand?

Blue earbuds — many substitutes, not essential.

When is demand inelastic?

When the elasticity value is less than 1 — consumers are not very sensitive to price changes.

What does unit elastic demand mean?

When elasticity equals 1 — total revenue stays the same when price changes.

What three factors affect price elasticity of demand?

1. Number of substitutes (more substitutes → more elastic).

2. Time period (longer time → more elastic).

3. Portion of income spent (larger portion → more elastic).

What is tax incidence?

How the burden of a tax is divided between buyers and sellers.

What does TR (Total Revenue) mean?

The total money a business receives from selling its product.

What is cross elasticity of demand (XED)?

Measures how demand for one product changes when the price of another product changes.

What does a positive XED mean

The goods are substitutes (like Coke and Pepsi).

What does a negative XED mean?

The goods are complements (like coffee and cream).

What is income elasticity of demand ?

Measures how demand changes when consumers’ income changes.

What does it mean if income elasticity is greater than 1?

The good is income elastic (a luxury).

What does it mean if income elasticity is between 0 and 1?

The good is income inelastic (a necessity).

Why do governments prefer to tax goods with inelastic demand or supply?

Because those markets generate more tax revenue with less change in quantity sold.

what demand curve has infinite elasticity?

horizontal demand curve 

If the price of an elastic product rises, the seller’s

total revenue will decrease

If a theatre cuts ticket prices and total revenue does not change, the price elasticity of demand for its tickets is

equal to 1

what is elasticity of supply

measures by how much the quantity supplied by businesses responds to a change in price.

Inelastic supply?

small response in quantity supplied when price rises. 

example: supply of mined gold

elastic supply?

large response in quantity supplied when price rises.

Elasticity of supply of a product or service is influenced by?

1) availability of additional inputs—more available inputs means more elastic supply.

2) time production takes—less time means more elastic supply.