Econ Midterm 2

Front 1

Elasticity

Back 1

Measure of responsiveness (shows how one variable reacts to changes in another)

Front 2

Price Elasticity of Demand

Back 2

measures the responsiveness or sensitivity of quantity demanded from changes in the price of the good

Front 3

Equation for price elasticity of demand

Back 3

E= %ΔQ/%ΔP

Front 4

Elastic

Back 4

percentage change in quantity is greater than percentage change in price; When E (elasticity number) is greater than 1.

Front 5

What does the elasticity number mean?

Back 5

For every 1% change in price, there will be an E% change in quantity demanded (Q changes by E times % change in price)

Front 6

Unit elastic

Back 6

Percent change in Q is equal to percent change in P (E=1)

Front 7

Factors that influence price elasticity

Back 7

Necessity vs. luxury, available substitutes, portion of budget spent on good (if you have to buy the item frequently = elastic), Time horizon (goods become more elastic the longer the time period we have to adjust to change in price)

Front 8

Perfectly inelastic

Back 8

Vertical demand curve (buying at set quantity of good regardless of price; E=0) Ex) Drugs

Front 9

Perfectly elastic

Back 9

Horizontal demand curve (we purchase the good only at a particular price- so sensitive that any change in price = don't buy any). ex) Perfectly competitive firms

Front 10

Midpoint formula

Back 10

E= (Δ Q/average Q)/( Δ P/average P); price elasticity will always be (-) due to law of demand, so take absolute value

Front 11

Demand curve and elasticity

Back 11

45 degrees line perpendicular to demand curve = E=1; below that point E <1, and above it E >1. X-intercept = E=0; Y-intercept = E=infinity (see notes)

Front 12

How to use elasticity coefficient

Back 12

For every 1% increase in price, quantity demanded falls by E(Q) % and vice versa

Front 13

Relationship between price elasticity and total revenue (PxQ)

Back 13

Elastic- if P goes down, then TR goes up and vice versa (since Q changes by a lot this will cover the drop in price so the seller earls more because they sell a lot more)
Inelastic- if P goes down then TR goes down and vice versa (since Q only rises by a little, don't sell enough extra units to cover lower price and revenues fall)

Front 14

Income elasticity of demand

Back 14

-responsiveness of quantity demanded to chnages in income (just replace P with Income in midpoint formula)
-for every 1% income increase, his quantity consumed falls by E(Q)%
-Ei >0 = normal good; Ei<0 = inferior good

Front 15

Cross price elasticity of demand

Back 15

-crosses price of one good to the quantity of another good
-use price of good B and quantity of good A in midpoint formula
-Ecp > 0, goods are substitutes; Ecp < 0, goods are complements