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elasticity

Terms in this set (29)

elasticity
the responsiveness of quantity demanded/supplied to a change in price
price elasticity of demand equation
elastic when (math)
elasticity >1
inelastic when (math)
elasticity <1
unit elastic when (math)
elasticity = 1]n
products with close substitutes have in/elastic demand and why
elastic, b/c if the price changes, people will either buy more or less of the product (altering quantity demanded more thus greater than 1) (ex. Dr. Pepper - specific)
products without close substitutes have in/elastic demand and why
inelastic, b/c regardless of price change people still need to buy that exact item (ex. beverages - broad)
narrowly defined product vs broadly defined products
narrow: a brand, very specific - can buy another brand to substitute (inelastic)
broad: not specific - speaks for all of its kind (ex. beverages) (inelastic) - you still need to buy these whatever their cost
explain short run and long run elasticity
depending on the item, (ex oil) people can't choose an alternate fuel because they have cars (inelastic) but in the long run, more green technologies are being created so they can switch (elastic)
how does elasticity affect expenditure
more elastic/less elastic (either price or quantity will take over and that will determine which way elasticity moves)
supply elasticity
responsiveness of supply to price
shift from producing one thing to another and how it affects supply elasticity
shift easily - elastic
shift hard - inelastic
(b/c higher change in q if can switch faster and costs less money)
cost of producing as output is varied and how it affects supply elasticity
cost low - elastic
cost high - inelastic
(b/c more expensive, won't make as many and q will be low and price change high)
long run supply is _____ elastic than the short run supply and why
more, b/c they can shift and make new products but it takes more time (right away they can only increase the price which makes it more inelastic)
excise tax
basically just tax
tax incidence
who pays the tax?
it depends on the elasticity of supply and demand
consumer price
price ultimately paid by consumer
seller price
price ultimately received by seller (w/o the tax)
who pays tax when demand inelastic to supply
consumer: b/c price changes a lot so they have to pay
who pays tax when supply is inelastic to demand
seller: b/c price changes more for seller so they have to pay
tax equation:
consumer price - seller price = tax
equation for income elasticity of demand
% change quantity demanded/% change income
normal good in terms of income elasticity
elasticity is postive
inferior good in terms of income elasticity
elasticity is negative
necessitites
income elasticity positive but less than one (normal good)
luxuries
income elasticity positive but more than one (normal good)
cross elasticity equation
% change quantity demanded/% change income
negative cross elatsicity
complement product
positive cross elasticity
substitute product
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