# 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
/ 60
Term:
Definition:
Definition: