Microeconomics Chapter 4: Elasticity – Flashcards
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Price Elasticity of Demand
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the ratio of the percent change in quantity demanded to the percent change in price as we move along the demand curve
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% Change in Quantity Demanded (Without Midpoint Method)(Equation)
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= ( new QD - old QD / old QD ) * 100
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% Change in Price (No Midpoint Method) (Equation)
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= ( new P - old P / old P ) * 100 P is Price
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Price Elasticity of Demand (No Midpoint Method) (Equation)
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= % change in quantity demanded / % change in price
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Midpoint Method
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a technique for calculating the percent change by calculating the changes in a variable compared with the average or midpoint of the starting and final values (replaces the usual definition of the percent change in a variable with a slightly different definition)
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% Change in X (Using the Midpoint Method) (Equation)
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= ((new X - old X) / ((old X + new X ) / 2 )) * 100
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Price Elasticity of Demand (Equation Using Points on a Graphed Curve)
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= (Q2 - Q1) / ((Q1 + Q2) / 2) / (P2 - P1) / ((P1 + P2) / 2) (Q1 is Q sub 1; Q2 is Q sub 2; P1 is P sub 1; P2 is P sub 2)
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Perfectly Inelastic Demand
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occurs when the quantity demanded does not respond at all to changes in the price (when graphed, the curve is a vertical line)
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Perfectly Elastic
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occurs when any price increase will cause the quantity demanded to drop to zero (when graphed, the curve is a horizontal line)
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Elastic
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describes the price elasticity of demand when the demand is grater than 1
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Inelastic
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describes the price elasticity of demand when it is less than 1
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Unit-Elastic Demand
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describes the price elasticity of demand when it is equal to 1
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Total Revenue
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the total value of sales of a good or service (equal to the price multiplied by the quantity sold)
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Total Revenue (Equation)
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= price * quantity sold
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Cross-Price Elasticity of Demand
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measures the effect of the change in one good's price on the quantity demanded of the other good (defined as: the ratio of the percent change in the quantity demanded of one good to the percent change in the price of the other)
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Cross-Price Elasticity of Demand (Equation)
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= % change in quantity of A demanded / % change in price of B
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Income Elasticity of Demand
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a measure of how much demand for a good is affected by changes in consumer's incomes
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Income Elasticity of Demand (Equation)
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= % change in quantity demanded / % change in income
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Income-Elastic
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describes the demand for a good when the income elasticity of demand for that good is greater than 1
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Income-Inelastic
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describes the demand for a good when the income elasticity of demand for that good is less than 1
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Price Elasticity of Supply
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the ratio of the percentage in the quantity supplied to the percent change in the price as we move along the supply curve
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Price Elasticity of Supply (Equation)
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= % change in quantity supplied / % change in price
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Perfectly Inelastic Supply
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occurs when the price elasticity of supply is zero, so that changes in the price of the good have no effect on the quantity supplied (when graphed, the curve is a vertical line)
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Perfectly Elastic Supply
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occurs when even a tiny increase or reduction in the price will lead to very large change in the quantity supplied (graphed as a horizontal line)
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Price Elasticity of Demand Facts
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when 0: perfectly inelastic - price has no effect on quantity demanded (vertical demand curve) when between 0 and 1: inelastic - a rise in price increases total revenue exactly 1: unit-elastic - changes in price have no effect on total revenue greater than 1 less than infinity: elastic - a rise in price reduces total revenue infinity: perfectly elastic - any rise in price causes quantity demanded to fall to 0. Any fall in rice leads to an infinite quantity demanded (horizontal demand curve)
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Cross-Price Elasticity of Demand Facts
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negative: the goods are complements positive: the goods are substitutes
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Income Elasticity of Demand Facts
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negative: inferior good positive, less than 1: normal good, income-inelastic greater than 1: normal good, income-elastic
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Price Elasticity of Supply Facts
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= % change in quantity supplied / % change in price 0: perfectly inelastic - price has no effect on quantity supplied (vertical supply curve) greater than 0, less than infinity: ordinary upward-sloping supply curve infinity: perfectly elastic - any fall in price elicits an infinite quantity supplied (horizontal supply curve)
