AGEC 217 Test 1

AGEC 217 Test 1
Ch. 5 Elasticity - -

- Elasticity - --the measure of the sensitivity of one variable to a change in
another variable

- Elastic portion of a curve - --flatter, quantity is more responsive to a
change in price

- Inelastic portion of a curve - --steeper, quantity is less responsive to a
change in price

- Own Price Elasticity (OPE) - --how the quantity of good x changes when
the price of good x is changed
-has heavy revenue implications
-follows the law of demand

Definition - %ΔQx/%ΔPx
Point Formula - (ΔQx/ΔPx)(Px/Qx)
Arc Formula - (ΔQx/ΔPx)(APx/AQx)
Calculus - (dQx/dPx)(Px/Qx)

I OPE I > 1, elastic, lower prices
I OPE I = 1, unit elastic
I OPE I < 1, inelastic, raise prices

- Determinants of OPE - --Substitutes: the more subs a good has, the more
elastic it is
-Degree of luxury and necessity: luxuries are more elastic b/c more subs
exist and they aren't needed, and necessities are more inelastic because a
price change won't really affect demand
-Time period: elasticity tends to be higher in the long run b/c more subs
become available over time

- Cross Price Elasticity (CPE) - --how the quantity of good x changes when
the price of good y changes
-determines whether goods are compliments, independent, or substitutes

Definition - %ΔQx/%ΔPy
Point Formula - (ΔQx/ΔPy)(Py/Qx)
Arc Formula - (ΔQx/ΔPy)(APy/AQx)
Calculus - (dQx/dPy)(Py/Qx)

CPE > 0, substitutes