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15 Cards in this Set
- Front
- Back
Elasticity
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Measure of responsiveness (shows how one variable reacts to changes in another)
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Price Elasticity of Demand
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measures the responsiveness or sensitivity of quantity demanded from changes in the price of the good
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Equation for price elasticity of demand
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E= %ΔQ/%ΔP
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Elastic
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percentage change in quantity is greater than percentage change in price; When E (elasticity number) is greater than 1.
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What does the elasticity number mean?
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For every 1% change in price, there will be an E% change in quantity demanded (Q changes by E times % change in price)
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Unit elastic
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Percent change in Q is equal to percent change in P (E=1)
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Factors that influence price elasticity
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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)
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Perfectly inelastic
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Vertical demand curve (buying at set quantity of good regardless of price; E=0) Ex) Drugs
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Perfectly elastic
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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
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Midpoint formula
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E= (Δ Q/average Q)/( Δ P/average P); price elasticity will always be (-) due to law of demand, so take absolute value
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Demand curve and elasticity
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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)
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How to use elasticity coefficient
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For every 1% increase in price, quantity demanded falls by E(Q) % and vice versa
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Relationship between price elasticity and total revenue (PxQ)
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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) |
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Income elasticity of demand
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-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 |
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Cross price elasticity of demand
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-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 |