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Economics SL IB > 1.2 Elasticity > Flashcards

1.2 Elasticity Flashcards

1
Q

What is elasticity?

A

How one variable reacts to a chance in the other.

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2
Q

What is PED?

A

Price Elasticity of Demand.

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3
Q

When a market is PED elastic what happens as price increases?

A

We buy less. So there is a chance in demand.

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4
Q

When a market is PED inelastic what happens as price increases?

A

We keep buying the same because we need it, there is no change in demand.

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5
Q

Do firms want elastic or inelastic curves?

A

Inelastic curves so they can increase price without a change in demand since they are profit maximisers.

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6
Q

What is XED?

A

Cross Elasticity of Demand.

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7
Q

What does XED mean?

A

Responsiveness in demand of A to a chance in the price of B. Looking at complements and substitutes.

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8
Q

What are complements?

A

Items often bought together e.g. banana and custard.

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9
Q

What are substitutes?

A

Cheaper alternatives e.g. own brand baked beans

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10
Q

What is YED?

A

Income elasticity of Demand.

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11
Q

What is YES?

A

Income elasticity of Supply

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12
Q

What does YED mean?

A

Responsiveness to change in demand to a change in consumer income.

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13
Q

An increase in consumer income will cause…

A

An increase in expensive products, a decrease in substitutes. More normal and luxury goods.

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14
Q

A decrease in consumer income will cause…

A

A decrease in demand for normal and luxury goods, as people move to substitutes and inferior goods.

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15
Q

Why is elasticity important?

A

Used for business planning, to anticipate customer demand, revenue and changes in business conditions.

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16
Q

Why are substitutes important?

A

Rival price changes
Multiple products, choices.
Combinations of normal and substitutes reduces competition.

17
Q

Why are complements important?

A

Impact the price change of each one.
Diversity among complement products.

18
Q

What are the limitations of elasticity?

A

It is difficult to measure
It changes over time.
As income grows elasticity if variable.
Elasticity doesn’t concern costs.

19
Q

What is PES?

A

Price elasticity of supply.

Responsiveness of quantity supplied to change in price.

20
Q

What does price inelastic supply cause?

A

Large price increase, but only a small quantity increase. Because there is not enough supply for the new demand.

21
Q

What does price elastic supply cause?

A

Small price increase, but large quantity increase. This is because there is excess supply for the new demand.

22
Q

What is the difference between inelastic and elastic?

A

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,

23
Q

What are the determinants of PES?

A

Whether the firm is at full capacity.
Type of good (how quick is it produced)
Time period, SR, LR

24
Q

PED equation

A

%Change of Demand over %Change of Price

25
Q

PED will always be…

A

negative

26
Q

PES will always be…

A

positive

27
Q

Postive YED represents a…

A

normal good

28
Q

Negative YED represents an…

A

inferior good

29
Q

Explain YED in SR and LR?

A

In the short run the price barely affects D or S
But in the LR it changes a lot

30
Q

What are the determinants of PED?

A

Luxury
Necessity
Availability of substitutes
time periods

31
Q

What is the price mechanism?

A

how the market allocates resources

32
Q

What happens when the price changes?

A

SIR

Signal
Incentive
Rationing

33
Q

Explain what is happening in this diagram

A

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

34
Q

What is the SIR in this diagram?

A

Signal = In the long run new firms appear ^supply
Incentive to produce more
Rationing what consumers can get

35
Q

PES Equation

A

%Change of Supply over %Change of Price

36
Q

YED Equation

A

%Change of Demand over %Change of Income

37
Q

XED Equation

A

%Change of Demand in A over %Change of Price of B

Economics SL IB (11 decks)

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