Elasticity of Demand and Supply Flashcards

Terms Definitions
Elastic Ed (define)
1% change in Price = More than 1% increase in Qd
Unit Elastic Price Elasticity of Demand (define)
1% change in Price = 1% change in Qd
Inelastic Price Elasticity of Demand (define)
1% change in Price will = less than 1% change in Qd
If Price and Total Revenue have an indirect relationship (when one increases, the other decreases) the Elasticity of Demand is _______.
Elastic
When an increase or decrease of Price does not change Total Revenue, the Elasticity of Demand is _______
Unit Elastic
When Price and Total Revenue have a direct relationship (when one increases the other increases or vis versa), the elasticity of demand is _________
inelastic
If Price increases and the elasticity of demand is elastic, then Total Revenue will ______
decrease
If Price decreases and the Ed is Elastic, Total Revenue will ______
increase
If Ed is Elastic, Price and Total Revenue have a(n) _______ relationship
indirect
If Ed is Elastic and Price increases, Total Revenue will ______
decrease
If Ed is elastic and Price decreases, Total Revenue will _______
increase
If Ed is Unit Elastic and Price Increases, Total Revenue will
not change
If Ed is Unit Elastic and Price decreases, Total Revenue will
not change
If Price and Total Revenue have a direct relationship (when one increases, so does the other and vis versa), then Ed is ________
Inelastic
If Ed is Inelastic and Price increases, Total Revenue will
increase
If Ed is Inelastic and Price decreases, Total Revenue will
decrease
Price elasticity of demand is always positive or negative?
negative
Price elasticity is stated as a pure (absolute) number
 
True or False
True
Can you determine Price elasticity from the look of the slope?
No
Factors that determine Price Elasticity of Demand (5)
1. Number of substitutes: a product with substitutes will have an elastic Price Elasticity of Demand.
2. Necessity or Luxury: goods that are necessities (glasses, cigs) will have an Inelastic Price Elasticity of Demand, while Luxury Items (jewelry) will have an Elastic Price Elasticity of Deand.
3. Level of Income: poor: basic will be elastic; rich basics will be Inelastic because you will buy the amount you need regardless of price.
4. Price of Product relative to income. large portion of given income - elastic, small portion of income - inelastic (we do not price shop for salt).
5. Length of Period of Adjustment. Price change over long time = elastic; short term inelastic: people will pay higher gas prices short term, but will buy better mileage cars long term.
Price Elasticity of Supply:Es (define)
measures suppliers' responses to changes in price
Perfectly Inelastic Price Elasticity of Supply (define)
1% change in Price = 0 change in Quantity Supplied
Inelastic Price Elasticity of Supply (define)
1% change in price = less than 1% change in Price Quantity Supplied
Unit Elastic Price Elasticity of Supply (define)
1% change in Price = 1% change in Quantity Supplied
Perfectly Elastic Price Elasticity of Supply (define)
1% change in Price = infinite change in Quantity Supplied
Elastic Price Elasticity of Supply (define)
1% change in Price = More than 1% change in Quantity Supplied
Determinants of Price Elasticity of Supply (7)
1. how quickly costs per unit rise as firms increase their output.
2. the availability of close input substitutes.
3. the amount of time available to adjust production to changing conditions
4. the degree of the market share controlled among producers
5. the expected future price of the product
6. the price of related inputs and related outputs
7. the speed of technological advances in production that can lower costs.
Income Elasticity of Demand (define)
measures the % change in Demand due to the % change on consumers' income.
Luxuries (define)
When the Income Elasticity of Demand is greater than 1 (and positive), then the good is a Luxury
Necessity (define)
When Income Elasticity of Demand is less than 1 and positive the good is a necessity
Inferior Goods (define)
When a decrease in Income Elasticity of Demand = an Increase in Demand the good is an Inferior Good.
 
Income Elasticity of Demand is negative.
 
(such as 99 cent store during recession)
Cross Elasticity of Demand (define)
Comparing % price change of one good to the % Quantity Demanded change of another.  Will determine if goods are substitutes or complements to each other.
Substitute Goods (define)
used to identify goods through Cross Elasticity. An increase in price for one will increase Quantity Demanded for the other and vis versa.
 
If the price of one brand of toothpaste goes up, people will purchase another brand, therefore they are substitutes.
 
Cross Elasticity of Demand = positive number
Complement Goods (define)
used to define goods when comparing Cross Elasticity. The increase of price for one good will decrease the Quantity Demanded of its complement.
 
Complement Goods = negative Cross Elasticity totals.
 
(pencils and pencil sharpeners)
Independent Goods
Identify type of good when measuring Cross Elasticity of Demand. When CED=0.
When calculating the % change of Equilibrium Price, an increase in demand = ________ in price
increase
When calculating the % change of Equilibrium Price, a decrease in demand = ________ in price
decrease
% change of Equilibrium Price and Demand have a(n) ________ relationship
direct
When calculating the % change of Equilibrium Price, an increase in Supply = ________ in price
decrease
When calculating the % change of Equilibrium Price, an decrease in Supply = ________ in price
increase
% change in Equilibrium Price and Supply have a(n) ________ relationship
indirect. When supply increases, Equilibrim Price decrease and vis versa
Applications of Price Elasticity of Demand (6)
1. Help explain revenue of Farmers in US and Developing Countries. 2. Formulate Taxation Policies. 3. Determine which Industries to run as Public Utilities. 4. Fix Prices for Monopolists. 5. Fix the rate of exchange. 6. Stablize Agricultural Prices.
An increase in Price = ______ in Ed
increase
A Decrease in Price = A(n) ____ in Ed
Decrease
Price and Ed have a(n) ______ relationship
direct. When one decrease/increases so does the other.
An increse in Quantity Demanded = _____ in Elasticity of Demand
decrease
A decrease in Quantity Demanded = _____ in Elasticity of Demand
increase
Quantity Demanded and Elasticity of Demand have a(n) ______ relationship
indirect. when one increases/decreases the other does the opposite.
Parallel lines get _____ inelastic the further away they are from the origin
more
Ed Measures the _____ response to change in price
buyers
Es measures the _____ response to change in ______.
producers....price
Ei measures the ________ response to change in ______
buyers....income
Ex measures the _____ response to change in _____ of other goods.
buyers...price
When Ei is negative the goods are
inferior
Es is always
positive
Ed is always ______
negative
Ei can be positive or negative. True or False
True
Ei is always positive.True or False
False
Ex can be positive, negative or zero.True or False
True
Ex can only be negative.True or False
False
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Term:
Definition:
Definition:

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