Flashcards
Chapter 4 - Elasticity and its applications
Cards in this deck (12)
- 1Define the price elasticity of demand and the income elasticity of demandThe price elasticity of demand measures how much the quantity demanded response to a change in price.
The income elasticity of demand measures how much the quantity demanded response to a change in consumer income - 2List and explain some of the determinants of the price elasticity of demand1. Availability of close substitutes: butter has a greater price elasticity because it is easily replaced by other spread
2. Necessity vs luxury: luxury goods have a greater price elasticity than necessary goods such as gas and electricity and sailing dinghies
3. Definition of the market: how broadly defined the market is, the narrower the more elastic, such as vanilla ice cream compared to the whole food market
4. Proportion of income devoted to product: furniture have relatively higher prices and more income needs to be devoted to it than compared to ice cream, therefore the higher the proportion of income devoted to the product the higher the price elasticity
5. Time horizon: goods tend to have more price elasticity over longer period of time, if price difference persists over time, people start to replace, fuel and fuel-efficient cars, public transport - 3If the price elasticity is greater than 1, is the demand elastic or inelasticIf price elasticity is greater than 1, the demand is elastic, thus the percentage change of quantity demanded is greater than the percentage change in price.
- 4If the price elasticity equals 0, is demand perfectly inelastic or perfectly elasticIf the price elasticity equals 0, demand is perfectly inelastic, thus there is no change in the quantity demanded when there is a change in price
- 5How is the price elasticity of supply calculated and what this measuresPrice elasticity of supply is calculated as the percentage change in quantity supplied divided by the percentage change in price.
It measures how much the quantity supplied responds to changes in price. - 6Is the price elasticity of supply usually larger in the short run or in the long run, whyPrice elasticity of supply is usually larger in the long run than the short run because firms cannot easily change size of factories to produce more or less of a good, so the quantity supplied is less responsive to price. Over longer periods of time firms can build new factories or close old ones, so the quantity supplied is more responsive.
- 7What are the main factors that affect the price elasticity of supply1. Time period: can be long for industries with high sunk costs, more difficult for a train company to put more trains and routes out than for a taxi company to get more cars, thus supply tends to have more price elasticity in the long run
2. Productive capacity: in periods of strong economic growth, more difficult to increase capacity when firm is already running on full capacaity, thus supply is inelastic
3. Size of firm: supply in smaller firms tends to be more price elastic than larger firms
4. Mobility of factors of production: the easiness of interchanging the way of production to meet demand, car chassis are the same across all model, supply more elastic
5. Ease of storing: stock can be nuild up to respond more flexible to changes in price, industries where stock is easy to build up is more price elastic, food industry is more inelastic - 8A business person reads that the price elasticity of demand for the product they sell is 1.25. If the person wishes to increase the revenue, should they increase or reduce the priceThe price elasticity of demand is 1.25 and therefore elastic. That means it is relatively sensitive to changes in price, thus the percentage change in quantity demanded is greater than the percentage change in price. If the person increases the price, total revenue will decrease, so the person should reduce the price of the product in order to increase the revenue.
- 9In the short run the price elasticity of demand for tobacco products is very low but over the medium term is less so, explainThe price elasticity of demand is less in in the short run because people are addicted to tobacco and it takes them more time to stop with the habit. Smokers are reluctant to immediately give up smoking even if price rises. Existing smokers are also unlikely to smoke significantly more of prices fall. However, in the medium term, a hefty price will increase the interest of people to give up smoking, so it would have a more price elastic response in the medium term.
- 10What do we call a good whose income elasticity is less than 1A good with an income elasticity less than 1 is called a normal good because as income decreases or rises, the quantity demanded doesn't change relatively
- 11What do we call a good whose income elasticity is less than 0A good with an income elasticity less than zero is called an inferior good because as income rises, the quantity demanded declines
- 12What factors might effect the price elasticity of supply for a commodity such as rubber in the short and in the long runThe price elasticity of supply for commodities like rubber, largely depends on the stocks held and the ease of increasing supply as rubber trees takes years to reach maturity. Thus, the elasticity of supply is most likely to be inelastic
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- Bachelor Economics (Week 1) Flashcards on Chapter 4 - Elasticity and its applications, created by A K on 15/04/2018.
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- A K · Apr 2018
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- Apr 22, 2018
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