3 Factors and Applications of Elasticity Free Online FlashCards

What does elasticity measure?

Elasticity measures how strongly buyers or sellers respond to a change in price, comparing percentage changes in quantity with percentage changes in price.

How is price elasticity of demand calculated?

Price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price: $E_d = \frac{\%\text{ change in quantity demanded}}{\%\text{ change in price}}$. It is generally negative, but economists usually report its absolute value.

How is price elasticity of supply calculated?

Price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price: $E_s = \frac{\%\text{ change in quantity supplied}}{\%\text{ change in price}}$.

How do elasticity values classify responsiveness?

Elasticity greater than $1$ is elastic, less than $1$ is inelastic, and equal to $1$ is unit elastic. These categories compare percentage changes, not changes in units.

How do close substitutes affect demand elasticity?

Demand tends to be more elastic when close substitutes are readily available because buyers can switch to similar alternatives after a price change.

Why is demand often more elastic for luxuries?

Demand tends to be more elastic for luxuries than necessities because buyers can more easily postpone or forgo optional purchases.

How does budget share affect demand elasticity?

Demand tends to be more elastic when a good takes a large share of a buyer’s budget, since a price change is more noticeable.

How can more time affect demand elasticity?

Demand tends to become more elastic over time because buyers have more opportunity to adjust their choices, such as changing vehicles or commuting habits after energy prices rise.

What makes supply more elastic?

Supply tends to be more elastic when firms have spare capacity, inventories, readily available inputs, and production methods they can adjust easily.

How does time usually affect supply elasticity?

Supply is often less elastic in the short run and more elastic over a longer period because sellers need time to change production. The size of this difference varies by market.

How is a seller’s total revenue calculated?

Total revenue is price multiplied by quantity sold: $TR = P \times Q$.

How does demand elasticity predict revenue after a price rise?

When demand is elastic, a price rise tends to reduce total revenue; when demand is inelastic, a price rise tends to increase it. With unit-elastic demand, a small price change leaves revenue approximately unchanged.