1.2 elasticities Flashcards
what is the definition of price elasticity of demand?
the sensitivity of demand to changes
in price
give the formula for PED
%∆𝑄𝑑 ÷ %∆𝑃
what is meant by ‘price elastic demand’?
demand is very sensitive to price - the % change in demand will be bigger than the % change in price
what values would constitute ‘price elastic demand’?
1 to ∞
what is meant by ‘perfectly price elastic demand’?
if we increase price by even 1%, we
lose all demand
what values would constitute ‘perfectly elastic demand’?
∞
what is meant by ‘price inelastic demand’?
demand is not very sensitive to price - the % change in demand will be smaller than the % change in price
what values would constitute ‘price inelastic demand’?
0 to 1
what is meant by ‘unit elastic demand’?
the % change in demand will be the same as the % change in price
what value would constitute ‘unit elastic demand’?
1
give the factors which influence the PED of a product
number of substitutes
proportion of income (%)
degree of luxury/necessity
addictiveness
time period
what is the definition of cross price elasticity of demand?
the sensitivity of demand of good A to a change in the price of good B
give the formula for XED
%∆𝑄d of Good A ÷ %∆𝑃 of Good B
what is the definition of substitute goods?
goods which can be used in place of one another
what values of XED would constitute a substitute?
positive
+
what is the definition of complementary goods?
goods that are used together
what values of XED would constitute complementary goods?
negative
what would an XED of 0 indicate?
unrelated goods
what is the definition of income elasticity of demand?
the sensitivity of demand to changes in income
give the formula for YED
%∆𝑄𝑑 ÷ %∆𝑌
what is the definition of an inferior good?
where demand increases when incomes fall
what values of YED would constitute an inferior good?
negative
what is a normal good?
when demand increases when incomes rise
what values of YED would constitute a normal good?
positive
+
what is the definition of a luxury good?
a type of normal good
demand is very sensitive to changes in income - the % change in demand will be larger than the % change in income
what values of YED would constitute a luxury good?
> 1
what is another term for a luxury good?
normal income elastic
what is the term for a normal good which is not a luxury good?
necessity
why do firms need to know the price elasticity of demand for their products?
so they can predict the impact of a price change on demand/revenue
under what circumstances would an increase in price increase the revenue gained from a product?
PED inelastic
under what circumstances would an increase in price decrease the revenue gained from a product?
PED elastic
under what circumstances would an increase in price leave revenue unchanged?
PED unit elastic
why do firms need to know the cross price elasticity of demand for their products?
to predict revenue change of one good when the price of another good changes
why do firms need to know the income price elasticity of demand for their products?
to predict revenue change of one good when incomes change
under what circumstances would a recession increase the sales of product?
inferior good
what is the definition of price elasticity of supply?
the sensitivity of supply to changes in price
give the formula for PES
%∆𝑄s ÷ %∆P
what is meant by ‘price elastic supply’?
supply is very sensitive to price - the % change in supply will be bigger than the % change in price
what values would constitute ‘price elastic supply’?
1 to ∞
what is meant by ‘perfectly price elastic supply’?
where supply is infinite at a certain price
what values would constitute ‘perfectly elastic supply’?
∞
what is meant by ‘price inelastic supply’?
supply is not very sensitive to price - the % change in supply will be smaller than the % change in price
what values would constitute ‘price inelastic supply’?
0 to 1
give the factors which influence the PES of a product
time
capacity
storability
what is meant by ‘perfectly price inelastic demand’?
only one quantity can be supplied, regardless of the price
what values would constitute ‘perfectly inelastic demand’?
0
what is the economic definition of the long run?
the period of time in which at least one factor of production is fixed
why is PES more elastic in the long run?
because firms have time to increase capacity
give the reasons why consumers may not act rationally
influence of other people
habitual behaviour
consumer weakness at consumption
explain how the influence of other people affects rationality
- sometimes individuals are influenced by social norms, known as a bias
- for example, someone buying something to ‘fit in’ or because everyone else has it, and so they are expected to too
- consumers become unwilling to change the bias, even if doing so will benefit them
- ‘herding behaviour’ occurs when an individual copies the actions of a large group e.g. the stock market
explain how habitual behaviour affects rationality
- habits reduce the amount of time it takes to do something because consumers no longer have to consiously think about their ations
- habits create a barrier to decision making since they limit or prevent consumers considering an alternative
- e.g. addictions willmake consumers buy more drugs/alcohol even though they know they should give up
- e.g consumers tend to buy products at eye level in the supermarket so higher priced products tend to be placed higher than lower priced products
explain how consumer weakness at consumption affects rationality
- some consumers aren’t willing or able to make price comparisons so they will by the unnessesary expensive good
- e.g. buying multipack because they believe it’s cheaper when it’s not in reality
- consumers are also poor at self-control and so they do things they know they shouldn’t
- they will also make decisions without looking at the long term effect
