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)
What does it mean for:
PES = 1
(graph)
Unit PES elastic: quantity supplied changes by the same magnitude as price changes.
(supply curves)
What does it mean for:
PES = 0
(graph)
PES perfectly inelastic: quantity supplied is completely unresponsive to price.
(vertical supply curve)
What does it mean for:
PES = infinity
(graph)
PES perfectly elastic: quantity supplied is infinitely responsive to price.
(horizontal supply curve)
What are four determinants of PES?
TUMS:
Time taken to produce/supply: the less time taken, the more elastic
Unused (spare) capacity of firms, the more spare capacity, the more elastic
Mobility of factors of production, the more mobile, the more elastic
Storage (ability to store): the more able to store, the more elastic
What types of products are usually price inelastic and price elastic (of supply)?
Primary goods are usually price inelastic.
Manufactured goods are usually price elastic.
How is PES linked to taxes?
It alters how the tax burden is divided between producers and consumers.
Price inelastic of supply: a greater burden on producers
Price elastic of supply: a greater burden on consumers
What is YED?
The Income Elasticity of Demand (YED) is a measure of the responsiveness of demand to changes in income, and involves demand curve shifts.
What is the equation for YED?
YED = % change in quantity demanded / % change in income
What does the sign indicate on YED?
If YED is positive: the good is normal (quantity demanded increases as income increases)
If YED is negative: the good is inferior (quantity demanded decreases as income increases)
What does a YED<1 indicate?
What happens on the graph?
Income inelastic of demand: the good is a necessity (quantity changes by less than income changes)
Shift in demand to the right (but not by a big amount)
What does a YED>1 indicate?
What happens on the graph?
Income elastic of demand: the good is a luxury (quantity changes by more than income changes)
Shift in demand to the right by a great amount.
What does a YED<0 indicate?
What happens on the graph?
The good is inferior (quantity changes by less than income changes but oppositely - one increases, the other decreases)
Shift in demand to the left
What does a YED = 1 indicate?
What happens on the graph?
Income unitary elastic of demand: the good is on the boundary between necessity and luxury (quantity changes by the magnitude as income changes)
Shift in demand to the right
