elasticity

    Cards (22)

    • elasticity is used to measure consumer responsiveness to changes in price, income, & other factors affecting demand
    • elasticity = % change in quantity demanded /  % change in factor examined
    • price elasticity of demand
      = % change in quantity /% change in price
    • PED
      always negative
      between 0 & 1, demand is inelastic
      = 1, demand is unit elastic
      above 1, demand is elastic
      all demand curves will have an elastic a inelastic portion separated by point of unit elasticity
    • availability of a close substitute
      • if consumers can easily switch to another good, they will be more price sensitive
       (larger price elasticity of demand)
      • if consumers cannot easily switch to another good, they will be less price sensitive
      (lower price elasticity of demand)
    • passage of time
      • it takes time for consumers to adapt to changes in prices
      • over time, demand becomes more elastic with respect to price
    • luxuries vs necessities
      • consumers are usually more elastic with luxury goods compared to necessity goods
    • market
      • fewer substitutes, demand is less elastic
      • more substitutes, demand is more elastic
    • consumer's budget
      • if money spent on good is a lot of money, demand is more elastic
    • perfectly inelastic demand
      = 0
      consumer will pay any price
    • perfectly elastic demand
      = infinite
      consumers will buy any quantity firms can produce at or below current market price but will never pay more than the set price
    • the income elasticity of demand could be positive or negative,
      depending on whether consumers buy more or less of the good as
      income increases
    • if the income elasticity > 0 then as I increases, Q also increases
      • when an increase in income generates an increase in quantity
      consumed, the good is called a normal good
    • if the income elasticity > 1
      • an increase in income generates a large increase in quantity
      consumed so the good is called a luxury good; conversely, a
      decrease in income generates a large decrease in quantity
      consumed
    • if the 0 ≤  income elasticity  ≤ 1
      • an increase in income generates a small increase in quantity
      consumed so the good is called a necessity good; conversely, a
      decrease in income generates only a small decrease in quantity
      consumed
    • if the income elasticity < 0
      • increase in income causes the quantity consumed to fall, so the good is called an inferior good; conversely, a decrease in income causes quantity consumed to rise
    • the cross-price elasticity of demand tells us how responsive consumer demand for one product is to changes in the price of another product
    • cross price elasticity of demand
      = % change in quantity of Good A /% change in price of Good B
       
      if cross price elasticity > 0, goods are substitutes
       
      if cross-price elasticity < 0, goods are complements
       
      if cross-price elasticity = 0, no relationship between goods
    • the Price Elasticity of Supply measures how responsive producers
      are to a change in price
       
      = % change in quantity /% change in price
       
      always positive
    • between 0 & 1, demand is inelastic
       
      = 1, demand is unit elastic
       
      above 1, demand is elastic
       
      all supply curves will have an elastic a inelastic portion separated by point of unit elasticity
    • availability of inputs
      • if inputs are easy to obtain, firms can easily increase production in response to price increases, supply is more elastic
      • supply is less elastic if inputs are difficult to obtain
       
      passage of time
      • less time, less elastic short term, hard to hire workers and source new materials
      • more time, more elastic, there is time to hire workers and find substitutes for materials
    • The more narrowly a market is defined, the more elastic demand will be because there are more available substitutes
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