1.2 Elasticity Flashcards
What is elasticity?
How one variable reacts to a chance in the other.
What is PED?
Price Elasticity of Demand.
When a market is PED elastic what happens as price increases?
We buy less. So there is a chance in demand.
When a market is PED inelastic what happens as price increases?
We keep buying the same because we need it, there is no change in demand.
Do firms want elastic or inelastic curves?
Inelastic curves so they can increase price without a change in demand since they are profit maximisers.
What is XED?
Cross Elasticity of Demand.
What does XED mean?
Responsiveness in demand of A to a chance in the price of B. Looking at complements and substitutes.
What are complements?
Items often bought together e.g. banana and custard.
What are substitutes?
Cheaper alternatives e.g. own brand baked beans
What is YED?
Income elasticity of Demand.
What is YES?
Income elasticity of Supply
What does YED mean?
Responsiveness to change in demand to a change in consumer income.
An increase in consumer income will cause…
An increase in expensive products, a decrease in substitutes. More normal and luxury goods.
A decrease in consumer income will cause…
A decrease in demand for normal and luxury goods, as people move to substitutes and inferior goods.
Why is elasticity important?
Used for business planning, to anticipate customer demand, revenue and changes in business conditions.
Why are substitutes important?
Rival price changes
Multiple products, choices.
Combinations of normal and substitutes reduces competition.
Why are complements important?
Impact the price change of each one.
Diversity among complement products.
What are the limitations of elasticity?
It is difficult to measure
It changes over time.
As income grows elasticity if variable.
Elasticity doesn’t concern costs.
What is PES?
Price elasticity of supply.
Responsiveness of quantity supplied to change in price.
What does price inelastic supply cause?
Large price increase, but only a small quantity increase. Because there is not enough supply for the new demand.
What does price elastic supply cause?
Small price increase, but large quantity increase. This is because there is excess supply for the new demand.
What is the difference between inelastic and elastic?
They both have to increase A at different rates to change B.
e.g.
An inelastic graph will have to change price a lot to change Demand. Whilst elastic would only need to change a bit,
What are the determinants of PES?
Whether the firm is at full capacity.
Type of good (how quick is it produced)
Time period, SR, LR
PED equation
%Change of Demand over %Change of Price
PED will always be…
negative
PES will always be…
positive
Postive YED represents a…
normal good
Negative YED represents an…
inferior good
Explain YED in SR and LR?
In the short run the price barely affects D or S
But in the LR it changes a lot
What are the determinants of PED?
Luxury
Necessity
Availability of substitutes
time periods
What is the price mechanism?
how the market allocates resources
What happens when the price changes?
SIR
Signal
Incentive
Rationing
Explain what is happening in this diagram
Demand has increased from D to D2
So there is a shortage at P
Therefore price increase p1 to p2
Firms produce more so increase in QS
Consumers want less because new price so decrease in QD
What is the SIR in this diagram?
Signal = In the long run new firms appear ^supply
Incentive to produce more
Rationing what consumers can get
PES Equation
%Change of Supply over %Change of Price
YED Equation
%Change of Demand over %Change of Income
XED Equation
%Change of Demand in A over %Change of Price of B
