ch. 5

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Author:
jillmray
ID:
67959
Filename:
ch. 5
Updated:
2011-02-21 18:43:51
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ECONOMICS
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Description:
ELASTICITY AND ITS APPLICATION
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  1. Elasticity
    • measures how much one variable responds to another
    • numerical measure of responsiveness of Qd or Qs to one of its determinants
  2. price elasticity equation
    % change in quantity/ % change in Price
  3. midpoint method equation
    (end value- start value)/midpoint * 100
  4. 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
  5. perfectly inelastic
    • Price E. is = 0
    • vertical line
    • no price sensitivity
  6. inelastic
    • relatively steep
    • low sensitivity
    • less than 1 PE<1
  7. unit elastic
    • PE = 1
    • intermediate slope
  8. elastic
    PE>1
  9. perfectly elastic
    • horizontal line
    • PE = infinity
  10. total revenue
    price * quantity
  11. if demand is elastic then revenue and price
    • move in opposite directions
    • negative correlations
  12. if demand is inelastic then price and total revenue
    • move in the same direction
    • positive correlation
  13. elasticity rule of thumb
    the flatter the slope the higher the elasticity

    the steeper the slope the lower the elasticity
  14. determinants of supply elasticity
    • depends on the flexibility of sellers to change amount of good they produce
    • (ex: its harder to produce more beachfront)
  15. for many goods price elasticity of supply is ____ in the long run than in the short run
    higher/ more elastic
  16. income elasticity of demand measures
    how the quantity demanded changes as consumer income changes

    % change in quantity demanded/ % change income
  17. income elasticity is ___ correlated to normal goods
    positively
  18. income elasticity is ___ correlated to inferior goods
    negatively
  19. 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
  20. cross price elasticity of demand is ____ correlated to substitutes
    positively
  21. cross price elasticity of demand is ___ correlated to complements
    negatively

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