1.2 Elasticities Flashcards
What does elasticity mean?
The measure of the responsiveness of a variable to changes in price or any of the variable’s determinants.
What does elastic and inelastic mean?
Elastic: high responsiveness
Inelastic: low responsiveness
What is PED?
The Price Elasticity of Demand (PED) is a measure of the responsiveness of the quantity of a good demanded to changes in its price.
What is the formula for PED?
PED = % change in quantity demanded / % change in price
What does the sign signify in PED?
The sign is always negative as PED follows the demand curve and law of demand - price and quantity demanded are always negatively related.
What does it mean for:
0 < PED < 1
(graph)
PED inelastic: quantity demanded changes by less than changes in price.
(steep demand curve)
What does it mean for:
1 < PED
(graph)
PED elastic: quantity demanded changes by more than changes in price.
(gradual demand curve)
What does it mean for:
PED = 1
(graph)
Unit PED elastic: quantity demanded changes by the same magnitude as price changes.
(curved graph)
What does it mean for:
PED = 0
(graph)
PED perfectly inelastic: quantity demanded is completely unresponsive to price.
(vertical demand curve)
What does it mean for:
PED = infinity
(graph)
PED perfectly elastic: quantity demanded is infinitely responsive to price.
(horizontal demand curve)
Which parts of the demand curve are elastic, inelastic and unitary?
The top part is price elastic, the middle is unitary (one point), the bottom part is price inelastic.
What are four determinants of PED?
TINS:
Time period to make decision/browse: more time, more elastic
Income (as a portion of): the larger the proportion, the more elastic
Necessity of the good: the more essential, the more inelastic
Substitutes (number of): the more substitutes, the more elastic
What types of products are usually price inelastic and price elastic?
Primary goods are usually price inelastic.
Manufactured goods are usually price elastic.
How is PED related to total revenue?
Total revenue follows what changes by more.
How is PED linked to taxes?
It alters how the tax burden is divided between producers and consumers.
Price inelastic of demand: a greater burden on consumers
Price elastic of demand: a greater burden on producers
What does XED mean?
Cross-price elasticity of demand (XED): is a measure of the responsiveness of demand for one good to a change in the price of another good, and involves demand curve shifts/
What is the formula for XED?
XED = % change in quantity demanded of good X / % change in the price of good Y
What does the sign signify in XED?
If XED is positive: the two products are substitutes.
If XED is negative: the two products are complementary.
What does the absolute value indicate in XED?
What happens if XED = 0?
The “strength” of the relationship.
If XED is a high positive number: close substitutes; if low: slight substitutes.
If XED is a high negative number: close complements; if low: slight complements.
If XED = 0: unrelated goods.
What is PES?
The Price Elasticity of Supply (PES) is a measure of the responsiveness of the quantity of a good supplied to changes in its price.
What is the formula for PES?
PES = % change in quantity supplied / % change in price
What does the sign signify in PES?
The sign is always positive as PES follows the supply curve and law of supply - price and quantity supplied are always positively related.
What does it mean for:
0 < PES < 1
(graph)
PES inelastic: quantity supplied changes by less than changes in price.
(steep supply curve)
What does it mean for:
1 < PES < infinity
(graph)
PES elastic: quantity supplied changes by more than changes in price.
(gradual supply curve)
