Chapter 5
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the percentage change in one variable in relation to the percentage change in another variale
Elasticity

measures the percentage change in quantity with respect to the percentage change in price
Price Elasticity

Categories of price elasticity
 Price elasticity of demand
 Price elasticity of supply

measures the response of quantity demanded with respect to its price
Price elasticity of demand

measures the responsiveness of quantity supplied in response to the percentage change in the price of goods and services
Price elasticity of supply

Two ways of calculating the price elasticity of demand
 Point elasticity
 Arc elasticity

measures the elasticity at a particular point
Point elasticity

Measures the elasticity between two points
Arc elasticity

Categories of price elasticity of demand
 price elastic demand
 price inelastic demand
 unitary elastic demand
 perfectly elastic demand
 perfectly inelastic demand

the value of price elasticity coefficient is greater than one
price elastic demand

the value of price elasticity coefficient is less than one
price inelastic demand

elasticity coefficient is equal to one
unitary elastic demand

coefficient equals infinity
perfectly elastic demand

elasticity coefficient equals zero
perfectly inelastic demand

Determinants of price elasticity of demand
 Importance or degree of necessity of the goods or services
 Number of available substitute
 The proportion of income in price changes
 The time period

Categories of price elasticity of supply
 Price elastic supply
 price inelastic supply
 unitary elastic supply
 perfectly elastic supply
 perfectly inelastic supply

change in price leads to a greater change in quantity supplied
price elastic supply

a change in price leads to a lesser change in quantity supplied
price inelastic supply

change in price leads to an equal change in quantity supplied
unitary elastic supply

occurs when there is no change in price and there is an infinite change in quantity supplied
perfectly elastic supply

occurs when a change in price has no effect on quantity supplied
perfectly inelastic supply

primary determinant of price elasticity of supply
Time period

Classification of time period
 Monetary or intermediate
 Shortrun
 Longrun

the responsiveness of quantity demanded in response to a change in income
income elasticity of demand

income elasticity is positive
normal good

income elasticity is negative
inferior good

normal goods with income elasticity is greater than one
luxury goods

measures the responsiveness of quantity demanded of a certain goods or service to a change in price of another good or service
cross elasticity of demand

measures whether the good is a substitute or a complementary
Cross elasticity of demand

goods that are used in conjunction with other goods
Complementary goods

goods that can be used in place of another
Substitute goods