3 Elasticity: Measurement and Determinants Free Online FlashCards

What does elasticity measure?

Elasticity measures the percentage response of one economic variable to a percentage change in another, holding other relevant factors constant.

Why do demand and supply elasticities usually have different signs?

Demand elasticity is normally negative because price and quantity demanded move in opposite directions; supply elasticity is usually positive because price and quantity supplied move together.

What makes the midpoint method useful for measuring elasticity?

The midpoint method uses the average of the starting and ending values as the base for each percentage change, giving the same result whichever endpoint is treated as the start.

How is point elasticity calculated?

At a specific point, elasticity is calculated as $E=\frac{dQ}{dP}\times\frac{P}{Q}$, using the function’s slope and the price and quantity at that point.

How are elastic, unit-elastic, and inelastic responses classified?

Demand is elastic when $|E_d|>1$, unit elastic when $|E_d|=1$, and inelastic when $|E_d|<1$. Supply uses the same comparisons with $E_s$.

Why is elasticity unitless, and what are its two limiting cases?

Elasticity has no units because it is a ratio of percentage changes. Perfectly inelastic elasticity is zero; perfectly elastic elasticity is infinite.

How does demand elasticity predict the revenue effect of a price change?

With inelastic demand, price and total revenue move in the same direction; with elastic demand, they move in opposite directions. Total revenue is $TR=P\times Q$.

How do close substitutes affect demand elasticity?

More and closer substitutes make demand for a product more elastic because buyers can switch more easily when its price rises.

How does time to adjust affect demand elasticity?

Demand is usually more elastic over a longer period because consumers have more time to find alternatives or change their habits.

Why is supply generally more elastic over a longer period?

Supply is generally more elastic over a longer period because producers can expand capacity, alter production, or new firms can enter.

How do spare capacity and input access affect supply elasticity?

Unused capacity and readily available labor or materials help firms increase output, making supply more elastic. Full capacity or hard-to-obtain inputs tend to make short-run supply less elastic.

Which production constraints can limit supply responsiveness?

Long growing periods, specialized facilities, or resources that are hard to move constrain rapid output increases. Flexible production processes or easily stored goods can allow a quicker response.