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Elasticity
measures how much one variable responds to another
numerical measure of responsiveness of Qd or Qs to one of its determinants
price elasticity equation
% change in quantity/ % change in Price
midpoint method equation
(end value- start value)/midpoint * 100
price elasticity of demand is high when
-close substitutes are available
-narrowly defined goods (blue jeans rather than just clothing)
-if item is a luxury
-in the long run
perfectly inelastic
Price E. is = 0
vertical line
no price sensitivity
inelastic
relatively steep
low sensitivity
less than 1 PE<1
unit elastic
PE = 1
intermediate slope
elastic
PE>1
perfectly elastic
horizontal line
PE = infinity
total revenue
price * quantity
if demand is elastic then revenue and price
move in opposite directions
negative correlations
if demand is inelastic then price and total revenue
move in the same direction
positive correlation
elasticity rule of thumb
the flatter the slope the higher the elasticity
the steeper the slope the lower the elasticity
determinants of supply elasticity
depends on the flexibility of sellers to change amount of good they produce
(ex
: its harder to produce more beachfront)
for many goods price elasticity of supply is ____ in the long run than in the short run
higher/ more elastic
income elasticity of demand measures
how the quantity demanded changes as consumer income changes
% change in quantity demanded/ % change income
income elasticity is ___ correlated to normal goods
positively
income elasticity is ___ correlated to inferior goods
negatively
cross price elasticity of demand
measures how the quantity demanded of one good responds to a change in the price of another good
% change in Qd of good 1/ % change in price of good #2
cross price elasticity of demand is ____ correlated to substitutes
positively
cross price elasticity of demand is ___ correlated to complements
negatively
Author:
jillmray
ID:
67959
Card Set:
ch. 5
Updated:
2011-02-21 23:43:51
Tags:
ECONOMICS
Folders:
Description:
ELASTICITY AND ITS APPLICATION
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