econ ch. 5

what is elasticity

Elasticity is the term economists use to measure the responsiveness of one variable to changes in another. We can measure the responsiveness of quantity demanded to changes in price, income, or other variables.

what is the formula for elasticity of demand?

Elasticity of demand is equal to the percentage change in quantity demanded divided by the percentage change in price. Because this will always be a negative number, the convention is to take the absolute value. Larger numbers (in absolute value) indicate that the demand is relatively more elastic

what will cross elasticity of demand for complements be?

For complements, cross elasticity will be negative. An increase in the price of one good causes a decrease in demand for the other.

what will cross elasticity of demand for subsititues be?

For substitutes, cross elasticity will be positive. An increase in the price of one good causes an increase in demand for the other.

what happens if the elasticity is equal to 1?

If the percentage change in quantity demanded is exactly equal to the percentage change in price, then elasticity will be equal to 1. In this instance, we say that the good is characterized by a unitary elasticity of demand.

how does luxuries versus necessities determine elasticity?

Luxuries tend to have demands that are more elastic than do neccesities. quanitity demanded will not change significantly when prices rise. luxuries on the other hand can be postponed or forgotten when prices rise.

what is price elasticity of supply?

Price elasticity of supply is the responsiveness of quantity supplied to changes in price. It is measured as the percentage change in quantity supplied divided by the percentage change in price.

how does supply become more elastic?

Supply becomes relatively more elastic over time, as firms have more ability to adjust output in response to a changing demand. The market period is a period of time so short that producers cannot adjust quantity.

what is the long run? When will the long-run industry supply curve be nearly horizontal

The long run is a period of time long enough for new firms to enter the industry. If an industry can expand without incurring higher costs, the long-run industry supply curve may be nearly horizontal.

what is the short run

The short run is a period of time in which the number of firms does not change, but each firm can adjust the output level.

how do you calculate elasticity?

There are more substitutes available The good represents a larger portion of the household budget A longer time period is being considered The good is more of a luxury rather than a necessity

when will deman be relatively more elastic?

There are more substitutes available The good represents a larger portion of the household budget A longer time period is being considered The good is more of a luxury rather than a necessity

how do we determine the incidence of a tax

To determine the incidence of a tax, we need to identify the party who truly bears the burden of the tax. Relative elasticities of supply and demand will help us measure the incidence of a tax.

when is the burden on the consumer?

To the extent that the price rises, the burden is shifted to the consumer. When demand is relatively inelastic (and the demand curve is steep), more of the burden is shifted to the consumer. ex: cigarettes-people still want them no matter what When supply is perfectly elastic, all of the tax burden is shifted to the consumer. A relatively inelastic supply generates a higher tax burden for producers.

what happens when demand is elastic?

When demand is elastic, the percentage change in quantity demanded will exceed the percentage change in price. Consequently, an increase in price will cause a significant reduction in the quantity demanded. In this instance, total revenue for the firm will fall when the price rises.

what does it mean when demand is inelastic?

When demand is inelastic, it means that the percentage change in quantity demanded will be less than the percentage change in price. Consequently, an increase in price will cause only a slight reduction in the quantity demanded. In this instance, total revenue for the firm will rise when the price rises.

what happens when demand is of unitary elasticity?

When demand is of unitary elasticity, then percentage change in quantity demanded will equal the percentage change in price. Consequently, an increase in price will cause a reduction in the quantity demanded by the same proportion. In this instance, total revenue for the firm will remain the same when the price changes.

what happens when the elastic demand value is greater than 1?

When the absolute value is greater than 1, we refer to this as an elastic demand. Demand for a product will be relatively more elastic as the number of substitutes rises.

what happens whenevr a tax is imposed?

Whenever a tax is imposed, the market outcome will be altered from its initial equilibrium point. This always generates a deadweight loss, but the magnitude of the loss will be greater when either demand or supply (or both) are relatively elastic.

what is the price elasticity of demand?

a measure of the responsiveness of quantity demanded to a change in price, equal to the percentage change in quanitity demanded divided by the percentage change in price

what are luxury goods

goods that have income elasticities greater than 1. when consumer income grows, quantity demanded rises more than the rise in income for luxury goods. ex: caviar

what are inferior goods

goods that have income elasticities that are negative. when consumer income grows quantitiy demanded falls for inferior goods. ex: public transportation

what are normal goods?

goods that have positive income elasticities but less than 1. when consumer income grows, quanitity demanded rises for normal goods but less than the rise in income ex: most products

what is total revenue

if demand is elastic and price rises, quantity demanded falls off significantly and total revenue declines, and vice versa. if demans is inelastic and price rises, quanitity demanded does not decline much and total revenue rises, and vice versa

what does income elasticity measure?

meaures how responsive quanitiy demanded is to changes in consumer income

how does sustainability determine elasticity?

the more close subsitutues a product has, the easier it is for consumers to switch to a competing product and the more elastic the demand.

how does proportion of income spent on a product determine elasticity?

the smaller the percent of household income spent on a product, the lower the elasticity of demand. ex: little of your income is spent on salt. as a result, a hefty increase in the price of salt would not affect your salt consumption because the impact on your budget would be tiny.

what is the market period?

time period so short that the output and the number of firms are fixed. agrucultural products at harves time face market periods. products that unexpectedly become instant hits face market periods (there is a lag between when the firm realizes it has a hit on its hand and when inventory can be replaced.

how does time period determine elasticity?

when consumers have some time to adjust their consumption patterns, the elasticity of demand becomes more elastic. when they have little time to adjust, the elasticity of demand tends to be more inelastic. ex: when gas prices rise suddenly, most consumers can't immediately change their transportation patterns so gas sales do not drop significantly.

what parts of the demand curve are elastic, unitary elastic, and inelastic?

Along a demand curve with a constant slope, the upper portions of the curve will be elastic, the midpoint will be of unitary elasticity, and the lower portions will be inelastic. Total revenue will be maximized at the midpoint.

what happens when the elastic demand value is less than one?

An absolute value less than one indicates an inelastic demand. This will be observed when consumers feel that there are few good substitutes available for the product.

what is an excise tax

An excise tax on a good will shift the supply curve to the left, generating a higher price. But the price rises by less than the full amount of the tax.

what does cross elasticty of demand measure

Cross elasticity of demand measures the responsiveness of quantity demanded to changes in the price of a related good.