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9 Cards in this Set
- Front
- Back
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Define price elasticity of demand and compute the elasticity coefficient given appropriate data on prices and quantities.
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Elasticity of demand is a measure of the responsiveness of quantity demanded to a change in price. To computer the elasticity coefficient, the formula is E(d) = (% change in the QD)/(% change in price) . |
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How would you calculate the price elasticity of demand using the main formula? What is the midpoint formula? |
Main formula: E(d) = (%CH in QD)÷(%CH in P). Percentage change is the difference from one point to another ÷ the original point (multiplied by 100). Midpoint formula: E(d) = (Q2-Q1)÷((Q2+Q1)/2) THEN ÷ (P2-P1)÷((P2+P1)/2). |
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Explain the meaning of elastic, inelastic, and unitary price elasticity of demand.
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Elastic = The QD changes greatly in response to a change in price of a good. Inelastic = The QD changes little in response to a change in price of a good. Unitary price elasticity of demand = The QD does not change in response to a change in price of a good. |
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When there is an elastic curve on a graph, if there is a _____ change in P, there will be a _____ change in QD (horizontal). When there is an inelastic curve on a graph, if there is a _____ change in P, there will be a _____ change in QD (vertical). Unitary elasticity is when the _____ does not change and is the _____ of a Price to QD graph. |
Small; large (on a P to QD graph, it is the top half). Large; small (on a P to QD graph, it is the bottom half). TR; midpoint. |
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Recognize graphs of relatively elastic and relatively inelastic demand curves.
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Relatively inelastic curves are sharper and more vertical than relatively elastic curves (perfectly inelastic = I, perfectly elastic = E. Relatively inelastic are closer to an I, or P.Inelastic curves). |
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Recognize graphs of perfectly elastic and perfectly inelastic demand.
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Perfectly inelastic = I (vertical, no change in QD). Perfectly elastic = E (horizontal, extreme change in QD). |
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Use the total revenue (TR) test to determine whether elasticity of demand is elastic, inelastic, or unitary.
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TR = QxP (quantity of good sold x price of good). Inelastic - P↓, TR↓. Unitary Elasticity - P↓, TR0 (does not change). Elastic - P↓, TR↑. |
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List and explain three major determinants of price elasticity of demand. |
The existence of substitutes (many substitutes = elastic, no subs. = inelastic). The share of the budget spent on a good (large budget share = elastic, small part of budget = inelastic - willing to spend more money on it). Whether the good is a necessity (inelastic) or a luxury (elastic). Time - Immediate run (inelastic), short run (elastic), long run (more elastic). |
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Explain how a change in each of the determinants of price elasticity would affect the elasticity coefficient.
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Substitutes: more substitutes = larger coefficient and vice versa. Budget share: larger budget share = larger coefficient and vice versa. Goes from necessity to luxury: larger coefficient and vice versa. Time: the longer you have to make a decision, the larger the coefficient gets. |
