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Flashcards by callum_j.smith, updated more than 1 year ago
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Created by callum_j.smith
over 11 years ago
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| Question | Answer |
| When can an elasticity be calculated ? | Whenever a change in one variable (good's price) causes a change to occur in a second variable (qty if the good that firms are prepared to supply) |
| Define elasticity | The proportionate responsiveness of a second variable to an initial proportionate change in the first variable. |
| If a 5% increase in price were to cause firms to increase supply more than proportionately (by 10%) than supply would be what ? | Elastic supply |
| If the response to a change in price were less than proportionate (increase in supply of only 3% from a 5% increase in price) supply would be what ? | Inelastic |
| If the change in price were to induce an exactly proportionate change in supply, supply would be what ? | Unit elasticity of demand |
| How is elasticity useful ? | - Useful descriptive statistic of the relationship between 2 variables because it is independent of the units, such as price and the QTY units, in which variables are measured. |
| What are the 4 main elasticities ? | 1) Price elasticity of demand 2) Price elasticity of supply 3) Income elasticity of demand 4) Cross-elasticity of demand |
| What is the formula to calculate price elasticity of demand ? | Proportionate change in QTY demanded (Divided by) Proportionate change in price |
| What is the formula for price elasticity of supply. | proportionate change in QTY supplied (Divided by) Proportionate change in price |
| What is the formula for the income elasticity of demand ? | proportionate change in QTY demanded (Divided by) Proportionate change in income |
| What is the formula for cross-elasticity of demand for good A with respect to the price of good B ? | Proportionate change in the QTY of A demanded (DIVIDED BY) Proportionate change in the price of B |
| Define price elasticity of demand | Measures consumer's responsiveness to a change in a good's price The proportionate change in demand for a good following an initial change in a good's own price |
| What is the simple rule used to determine the general nature of elasticity between any two points on the demand curve ? | - If total consumer expenditure INCREASES in response to a price fall, demand is ELASTIC - If total consumer expenditure DECREASES in response to a price fall, demand is INELASTIC - If total consumer expenditure remains constant in response to a price fall, demand is neither elastic nor inelastic i.e. elasticity= unity (1) |
| Explain what happens to elasticity as you move down a negatively sloping linear demand curve | - The price elasticity of demand falls from point to point along the curve - Demand is elastic (Greater than unity) at all points along the top half of the curve. -Elasticity equals unity exactly half way along the curve -Along the bottom half of the curve, elasticity falls below unity and towards zero |
| What is rectangular hyperbola ? | Where there is a constant elasticity of 1 at all points on the curve. Elasticity equals unity at all points on the curve |
| Explain what happens to elasticity on a non-linear demand curve | Whenever the price falls, the proportionate change in QTY demanded exactly equals the proportionate change in price. Consumer expenditure remains unchanged following a rise or fall in price. |
| Horizontal and vertical demand curves have what type of elasticities ? | Constant elasticities at all points on the curve |
| What is the elasticity of a horizontal demand curve like ? | Infinitely elastic or perfectly elastic |
| What is the elasticity of a vertical demand curve like ? | Completely inelastic displaying 0 price elasticity of demand at all points on the curve. A fall in price leaves QTY demanded demanded unchanged |
| How do mathematicians draw demand and supply curves ? What is the effect on elasticity ? | QTY on the vertical axis and price on the horizontal axis Vertical curves are infinitely elastic Horizontal curves have a zero elasticity |
| All elasticities above 1 are what ? | elastic All less than 1 are inelastic |
| On a negative sloping demand curve, what is elasticity ? | A negative number |
| What do economists do with the minus sign of elasticity ? | They ignore the minus sign |
| Most of the elasticity statisitics for the demand for cigarettes are between 0 and 1. Discuss the significance of this for governments. | 1) Shows that with a rise in price, there is a more or less proportionate decrease in demand 2) Price elasticity of demand is inelastic 3) Cigarettes are a demerit good 4) Negative externalities of cigarettes |
| If PED is greater than 1, the good is price ? | elastic |
| Give an example of PED higher than 1 | 15% fall in price leading to a 30% increase in QTY demanded means price elasticiy is 2.0 |
| Draw an elastic demand curve | |
| If PED is less than 1, the good is what ? | inelastic Demand is not very responsiveness to changes in price |
| If there is a 20% increase in price and a 5% fall in QTY demanded, the price elasticity of demand is what ? | 0.25 |
| If PED is equal to 1, the good is what ? | Unit elasticity of demand The percentage change in demand is equal to the percentage change in price |
| IF PED is equal to 0, the the good is what ? | Perfectly inelastic A change in price has no impact on the QTY demanded, shown by vertical demand curve |
| if PED is infinity, the good is what ? | perfectly elastic Any change in price will see QTY fall to 0. |
| A good with a PED of 0 is associated with what? | Firms operating in perfectly competitive markets |
| Draw a relatively inelastic demand curve | |
| What are the main factors determining the price elasticiy of demand ? | 1) Substitutability 2) Percentage of income 3) Necessities or luxuries 4) Width of the market definition 5) Time 6) Habit forming goods |
| Explain how substitutability determines the price elasticiy of demand | - Consumers respond to a price rise by switching expenditure away from the good, buying instead a substitute whose price has not risen - When very close substitutes are available, demand for a product is highly ELASTIC - Demand is likely to be inelastic when no substitutes are available. |
| Explain how the % of income can determine price elasticity of demand | Demand curves tend to be more elastic for goods and services upon which households spend a large proportion of their income on than those small items which account for only a small fraction |
| Explain how necessities and luxuries can affect the price elasticity of demand | - The substitute effect works heavily against the effect of inferior and luxury goods - Usually we may say the demand for necessities is price inelastic and the demand for luxuries is elastic - HOWEVER demand for certain foodstuff is likely to be elastic if other staple foods are available as subs |
| Explain how the width of the market definition can affect the price elasticity of demand | - Wider the definition of the market, the lower the price elasticity of demand - Elasticity of demand of a good produced by all firms in a market will be greater than that for the good as a whole |
| Explain how time can determine the price elasticity of demand | - Demand tends to be more elastic in the long run than in the short run - It takes time to respond to price changes - HOWEVER sudden rises in the price of a good may cause consumers to economise in its use in the short term before getting used to the price and getting back to old habits |
| Give an example of how time can determine the price elasticity of demand | After the two world oil price shocks of the 1970s - the "response" to higher oil prices was modest in the immediate period after price increases. In the long run people found ways to consume less petroleum and other oil petrol products. This included measures to get better mileage from their cars; higher spending on insulation in homes and car pooling for commuters. The demand for oil became more elastic in the long-run. |
| Define price elasticity of supply | Measures the relationship between change in the quantity supplied and a change in price |
| A rise in price causes firms to respond how ? | By supplying more of the good |
| The key note of supply curve is not the slope but what ? | Whether the supply curve intersects the price axis or the QTY axis. |
| If the supply curve intersects the price axis, the curve is what at all points ? | The curve is elastic at all points Elasticity falls towards unity moving from point to point up the curve |
| If the supply curve intersects the QTY axis, the curve is what at all points ? | Inelastic Elasticity rises towards unity moving from point to point up the curve |
| If the supply curve passes through the origin, elasticity is what ? | Elasticity equals unity (+1) at all points on the curve |
| Describe the properties of elasticity on a non-linear supply curve | - Elasticity falls moving from point to point up the curve - Supply is elastic in the lower section and inelastic in the upper section of the curve |
| What is the difference between perfectly elastic demand and perfectly inelastic supply? | Supply is perfectly elastic at ALL prices ON or ABOVE the supply curve - If the price falls below the supply curve, the amount supplied immediately drops to 0 - If they are paid the perfectly elastic price or any higher, firms stay in the market - Firms leave the market at a lower price as the incentive to stay falls unable to make sufficient profit. |
| What is the impact of UK households having an income elasticity of demand for housing exceeding +1, demand for housing being price inelastic and low price elasticity of supply for housing ? | Push UK's housing market towards long-term rising prices |
| What generally needs to happen for supply of housing to equal demand in the long term ? | Higher price elasticity of supply for housing |
| What are the main factors determining the price elasticity of supply ? | 1) The length of the production period 2) The availability of spare capacity 3) The ease of accumulating stocks 4) The ease of switching between alternative methods of production 5) The number of firms in the market and the ease of entering the market 6) Time |
| Explain how the length of the production period affects the elasticity of supply | - If firms can convert raw materials into finished goods very quickly then supply will tend to be more elastic - If the length of the production period increases (agricultural goods) then supply will be less elastic |
| Explain how the availability of spare capacity can affect the price elasticity of supply (When is the supply most elastic ?) | - More spare capacity means a business can increase output without a rise in costs - supply will be elastic in response to a change in demand. The supply of goods and services is most elastic during a recession, when there is plenty of spare labour and capital resources. |
| Explain how the ease of accumulating stocks can affect price elasticity of supply | - Firms can respond quickly to a sudden increase in demand when stocks of unsold finished goods are stored at low cost. Supply will be ELASTIC -Firms can respond to a price fall by diverting current production away from sales and into stock accumulation. |
| Explain how the ease of switching between alternative methods of production affects the price elasticity of supply | - Supply tends to be elastic when firms can quickly alter the way they produce goods (e.g. switching between capital and labour) -If firms produce a range of products and can switch raw materials, machines or labour from one type of production to another, the supply of any 1 product becomes elastic |
| Explain how the number of firms in the market and the ease of entering the market can affect price elasticity of supply | - More firms in the market, greater the ease with which a firm can enter or leave, the greater the elasticity of supply |
| Explain how Time can affect the price elasticity of supply | In the long run, supply becomes more elastic than in the short run |
| Explain market period supply | - Supply is completely inelastic in the market period (vertical curve) showing that firms cannot immediately increase output following a sudden increase in demand - Price can rise to eliminate excess demand |
| Explain short-run supply | -Higher price means higher profits, creating incentive for firms to increase output - Short-run, firms can increase output by hiring more variable factors of production such as labour. - More elastic than market period supply curve - QTY supply increases and the price falls |
| Explain long-run supply | - If firms believe that an increase in demand will be long lasting, they may increase the scale of production by employing more capital and other factors of production fixed in the short run but variable in long run -Supply curve becomes more elastic, output rises and the price falls |
| In a competitive industry with low or non-existent barriers to entry, what is elasticity of supply like in the long run and short run ? Why ? | - Elasticity is greater in the long run than in the short run because in the long run firms can enter or leave the market -Short-run supply is less elastic because supply is restricted to the firms already in the industry |
| Define income elasticity of demand | The proportionate change in demand for a good following an initial proportionate change in the consumers' income |
| The nature of income elasticity of demand depends on what 2 things ? | Whether the good is 1) A normal good 2) An inferior good |
| What is income elasticity of demand always like for an inferior good and a positive good ? | Negative for inferior good Positive for normal good |
| As income increases, a higher quantity is demanded for what type of good ? | Normal goods |
| Normal goods can be divided into what goods? | 1) Superior or Luxury goods- elasticity greater than +1 2) Basic goods- elasticity between 0 and +1 |
| Explain how demand changes for basic goods and superior goods as income rises | 1) Rises more than proportionately for a superior good 2) Demand for a basic good rises at a slower rate than income |
| Define cross-elasticity of demand | Measures how the demand for one good responds to changes in the price of another good. |
| The cross-elasticity of demand between 2 goods or services indicates the nature of what ? | The demand relationship between the goods |
| What are the 3 possibilities for goods with a cross-elasticity of demand ? | - Joint demand (Complementary goods) - Competing demand (subs) - An absence of any discernible demand relationship |
| Complementary goods have what cross-elasticity of demand ? | Negative cross-elasticities of demand A rise in the price of one good leads to a fall in demand for the other good. |
| What is the cross-elasticity of demand between 2 goods which are substitutes like ? | Positive A rise in the price of one good causes demand to switch to the substitute good whose price has not risen. Demand for the substitute good increases. |
| Explain the idea of 'no discernible demand relationship' | Where the rise in the price of one good has no measurable effect upon the demand for the other good. The cross-elasticity of demand is 0 |
| A firms ability to increase the price charged to customers by the full amount of a tax imposed on their good depends on what ? | Price elasticity of demand (Elasticity of the curve that has not shifted) |
| When demand is relatively elastic, consumer resistance means what happens with the tax ? | Some, but not all, of the tax is passed on to consumers as a price rise. |
| The tax per unit is measured by what on the D/S diagram ? | The vertical distance between S1(before the tax was imposed) and S2(after the tax was imposed) |
| What is the effect of an imposed tax when demand is elastic ? | Producers must absorb most of the tax and accept lower profit margins on each unit. |
| When firms increase the price, passing all the tax onto consumers, what is the consequence ? | Excess supply at this price |
| In a new equilibrium where price has fallen to remove excess supply after trying to pass ALL of the tax onto consumers, what is the impact ? | Part, but not all of the tax has been passed on to consumers as a price rise. |
| When demand is relatively elastic, the new equilibrium where consumers only pay part of the tax amounts to less than what of the tax ? | less than 50% of the TAX |
| What is a shifted incidence of the tax ? | The part of the tax passed on to consumers as a price rise |
| What is unshifted incidence ? | Rest of a tax borne by firms and producers to pay, not for the consumers to pay. |
| Total tax revenue paid by firms to the government is shown by what on an D/S diagram ? | |
| How does a firm's ability to pass the incidence of tax on to consumers as a price rise change with completely inelastic demand and perfectly elastic demand ? | Greatest with completely inelastic demand Non-existent when demand is perfectly elastic |
| What is the effect of an increase in income tax on the demand curve for a normal good and an inferior good ? | Shifts leftward for normal goods Rightward for inferior goods |
| What is the effect of subsidies on the supply curve ? | Shifts the supply curve rightward showing that firms are prepared to supply more of the good at all prices |
| The extent to which price or output changes following a shift of demand or supply depends on what ? | The slope and the elasticity of the curve that has NOT shifted |
| With an elastic supply curve, an outward shift in demand causes what ? | The QTY adjustment is greater than the price adjustment |
| Where the supply curve is inelastic , what is the effect of an outward shift in demand ? | The quantity adjustment is lower than the price adjustment |
| The extent to which the good's price or equilibrium level of output changes depends on what ? | The price elasticity of the curve which has NOT shifted |
| Explain how price elasticity of demand affects total consumer spending when a good's price changes (12 marks) | - |
| Explain how the price elasticity of supply of new housing has affected UK house prices in recent decades | - |
| Evaluate the view that the ability of firms to exploit their customers depends on the price elasticity of demand for their products (25 marks) | - |
| 'When demand is elastic, taxing a good can succeed in switching consumer expenditure away from the good; it is less successful at raising revenue for the government' Evaluate this view (25 marks) | - |
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