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Y1 ECON > 1.2 elasticities > Flashcards

1.2 elasticities Flashcards

1
Q

what is the definition of price elasticity of demand?

A

the sensitivity of demand to changes
in price

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2
Q

give the formula for PED

A

%∆𝑄𝑑 ÷ %∆𝑃

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3
Q

what is meant by ‘price elastic demand’?

A

demand is very sensitive to price - the % change in demand will be bigger than the % change in price

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4
Q

what values would constitute ‘price elastic demand’?

A

1 to ∞

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5
Q

what is meant by ‘perfectly price elastic demand’?

A

if we increase price by even 1%, we
lose all demand

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6
Q

what values would constitute ‘perfectly elastic demand’?

A

∞

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7
Q

what is meant by ‘price inelastic demand’?

A

demand is not very sensitive to price - the % change in demand will be smaller than the % change in price

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8
Q

what values would constitute ‘price inelastic demand’?

A

0 to 1

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9
Q

what is meant by ‘unit elastic demand’?

A

the % change in demand will be the same as the % change in price

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10
Q

what value would constitute ‘unit elastic demand’?

A

1

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11
Q

give the factors which influence the PED of a product

A

number of substitutes
proportion of income (%)
degree of luxury/necessity
addictiveness
time period

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12
Q

what is the definition of cross price elasticity of demand?

A

the sensitivity of demand of good A to a change in the price of good B

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13
Q

give the formula for XED

A

%∆𝑄d of Good A ÷ %∆𝑃 of Good B

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14
Q

what is the definition of substitute goods?

A

goods which can be used in place of one another

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15
Q

what values of XED would constitute a substitute?

A

positive
+

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16
Q

what is the definition of complementary goods?

A

goods that are used together

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17
Q

what values of XED would constitute complementary goods?

A
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18
Q

what would an XED of 0 indicate?

A

unrelated goods

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19
Q

what is the definition of income elasticity of demand?

A

the sensitivity of demand to changes in income

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20
Q

give the formula for YED

A

%∆𝑄𝑑 ÷ %∆𝑌

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21
Q

what is the definition of an inferior good?

A

where demand increases when incomes fall

22
Q

what values of YED would constitute an inferior good?

A
23
Q

what is a normal good?

A

when demand increases when incomes rise

24
Q

what values of YED would constitute a normal good?

A

positive
+

25
Q

what is the definition of a luxury good?

A

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

26
Q

what values of YED would constitute a luxury good?

A

> 1

27
Q

what is another term for a luxury good?

A

normal income elastic

28
Q

what is the term for a normal good which is not a luxury good?

A

necessity

29
Q

why do firms need to know the price elasticity of demand for their products?

A

so they can predict the impact of a price change on demand/revenue

30
Q

under what circumstances would an increase in price increase the revenue gained from a product?

A

PED inelastic

31
Q

under what circumstances would an increase in price decrease the revenue gained from a product?

A

PED elastic

32
Q

under what circumstances would an increase in price leave revenue unchanged?

A

PED unit elastic

33
Q

why do firms need to know the cross price elasticity of demand for their products?

A

to predict revenue change of one good when the price of another good changes

34
Q

why do firms need to know the income price elasticity of demand for their products?

A

to predict revenue change of one good when incomes change

35
Q

under what circumstances would a recession increase the sales of product?

A

inferior good

36
Q

what is the definition of price elasticity of supply?

A

the sensitivity of supply to changes in price

37
Q

give the formula for PES

A

%∆𝑄s ÷ %∆P

38
Q

what is meant by ‘price elastic supply’?

A

supply is very sensitive to price - the % change in supply will be bigger than the % change in price

39
Q

what values would constitute ‘price elastic supply’?

A

1 to ∞

40
Q

what is meant by ‘perfectly price elastic supply’?

A

where supply is infinite at a certain price

41
Q

what values would constitute ‘perfectly elastic supply’?

A

∞

42
Q

what is meant by ‘price inelastic supply’?

A

supply is not very sensitive to price - the % change in supply will be smaller than the % change in price

43
Q

what values would constitute ‘price inelastic supply’?

A

0 to 1

44
Q

give the factors which influence the PES of a product

A

time
capacity
storability

45
Q

what is meant by ‘perfectly price inelastic demand’?

A

only one quantity can be supplied, regardless of the price

46
Q

what values would constitute ‘perfectly inelastic demand’?

A

0

47
Q

what is the economic definition of the long run?

A

the period of time in which at least one factor of production is fixed

48
Q

why is PES more elastic in the long run?

A

because firms have time to increase capacity

49
Q

give the reasons why consumers may not act rationally

A

influence of other people
habitual behaviour
consumer weakness at consumption

50
Q

explain how the influence of other people affects rationality

A
  • 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
51
Q

explain how habitual behaviour affects rationality

A
  • 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
52
Q

explain how consumer weakness at consumption affects rationality

A
  • 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

Y1 ECON (13 decks)

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