Questions and Answers
What does elasticity measure?
What is the formula for the price elasticity of demand?
Percent change in quantity demanded of good x / percent change in price of good x
If the price elasticity of demand is greater than 1, it is considered elastic.
True
If the price elasticity of demand is less than 1, it is considered inelastic.
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What does it mean if the price elasticity of demand equals 1?
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What is the definition of income elasticity of demand?
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If income elasticity is greater than 0, the good is considered a normal good.
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If income elasticity is negative, the good is considered an inferior good.
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What is the formula for cross-price elasticity of demand?
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What does a cross-price elasticity greater than 0 indicate?
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A cross-price elasticity equal to 0 means the goods are unrelated.
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A cross-price elasticity less than 0 indicates that the goods are complementary.
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What is the formula for the price elasticity of supply?
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If elasticity of supply is greater than 1, it is considered elastic supply.
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If elasticity of supply is less than 1, it is considered inelastic.
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What is a determinant of price elasticity of demand?
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Necessity goods are generally elastic.
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Luxury goods are generally elastic.
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What happens to total revenue when price and total revenue move in opposite directions?
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What happens to total revenue when price and total revenue move in the same direction?
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Total revenue is unaffected by a change in price when demand is unit elastic.
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Study Notes
Elasticity in Microeconomics
- Elasticity measures the strength of buyers' response to changes in variables like price and income.
Price Elasticity of Demand
- Defined as the ratio of the percent change in quantity demanded to the percent change in price of a good.
- Elastic Demand: Occurs when price elasticity of demand is greater than 1, indicating that consumers are highly responsive to price changes.
- Inelastic Demand: Happens when price elasticity of demand is less than 1, suggesting that consumers are less responsive to price changes.
- Unit Elastic Demand: When price elasticity of demand equals 1, indicating proportional changes in quantity demanded and price.
Income Elasticity of Demand
- Represents the ratio of the percent change in quantity demanded to the percent change in income.
- Normal Goods: When income elasticity is greater than 0; demand increases as income rises.
- Inferior Goods: When income elasticity is less than 0; demand decreases as income rises.
Cross-Price Elasticity of Demand
- Defined as the ratio of the percent change in quantity demanded of one good to the percent change in price of another good.
- Substitute Goods: If cross-price elasticity is greater than 0, indicating that an increase in the price of one good leads to an increase in the demand for another.
- Unrelated Goods: If cross-price elasticity equals 0, meaning changes in the price of one good do not affect the other.
- Complementary Goods: If cross-price elasticity is less than 0, meaning an increase in the price of one good leads to a decrease in the demand for the other.
Price Elasticity of Supply
- Defined as the ratio of the percent change in quantity supplied to the percent change in price of a good.
- Elastic Supply: When elasticity of supply is greater than 1, indicating a high responsiveness of quantity supplied to price changes.
- Inelastic Supply: Occurs when elasticity of supply is less than 1, indicating a low responsiveness to price changes.
- Unit Elastic Supply: When elasticity of supply equals 1, showing proportional changes in quantity supplied and price.
Determinants of Price Elasticity of Demand
- Substitute Goods: More substitutes lead to greater elasticity; consumers can switch easily.
- Income: Goods that take up a larger proportion of income tend to be more elastic.
- Necessity vs. Luxury: Necessity goods tend to be inelastic, while luxury goods are elastic.
- Durability: Durable goods, due to lasting utility, have elastic demand as purchases can be postponed.
- Time: Greater time for adjustment increases elasticity, as consumers can change habits and find alternatives.
Total Revenue
- Total revenue is the income a firm gains from selling its goods or services, calculated as price multiplied by quantity demanded.
- Price and total revenue move in opposite directions in elastic scenarios; lowering prices increases total revenue.
- In inelastic scenarios, price and total revenue move in the same direction; raising prices increases total revenue.
- Total revenue remains unchanged with price changes when demand is unit elastic.
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Explore key terms and concepts related to elasticity in microeconomics with these flashcards. Understand how buyers respond to price changes and the implications of elasticity on demand. Perfect for students looking to reinforce their knowledge in this essential economic principle.
