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20 Cards in this Set
- Front
- Back
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Price elasticity of demand |
Measures how much the quantity demanded of a good changes when its price changes Measures a goods sensitivity to price changes |
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Higher demand price elasticity |
Luxury goods Available substitute goods Longer time period |
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Calculating Demand Elasticity |
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Rules in calculating price elasticity |
1. All elasticities are positive 2. Percent changes NOT absolute changes *changes in unity does not affect elasticity 3. Use of averaging for base price |
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Formula for demand elasticity |
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Elastic demand |
E>1 |
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Unit elastic demand |
E = 1 |
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Inelastic demand |
E < 1 |
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Perfectly elastic demand |
E = infinite |
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Perfectly inelastic demand |
E = 0 |
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Elasticity at a point on a line |
Ratio of the length of the straight line segment below the point to the line segment aove
* for curved lines, get tangent |
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Total Revenue |
Price X Quantity |
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Price inelastic demand (revenue) |
Price decrease reduces revenue |
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Price elastic demand (revenue) |
Price decrease increases total revenue |
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Unit elastic demand (revenue) |
Price decrease leads to mo change in revenue |
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Supply Elasticity |
Responsiveness of qty supplied of a good to its market price |
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Supply elasticity tends to be high |
1. Availability of inputs 2. Longer time frames |
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Tax incidence |
Impact of a tax on the incomes of producers and consumers |
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Burden of taxes |
Cosumers if demand is inelastic relative to supply Producers if supply is inelastic relative to demand |
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Subsidy |
Negative tax Causes a shift down in the supply curve |
