1.2 How markets work (1.2.3-1.2.5) Flashcards
What is Price Elasticity of Demand?
it measures the responsiveness of quantity demanded to a change in price
What is the formula for PED?
% change in quantity demanded ÷ % change in price
When PED > 1 what kind of demand is this?
Elastic demand
When PED < 1, what kind of demand is this?
Inelastic demand
When PED = 1, what is this?
Unitary Elasticity
Why is PED always a negative number?
Due to the law of demand, as price goes up quantity demanded goes down
What is the formula for income elasticity of demand?
% change in quantity demanded ÷ % change in income
What does YED mean?
Income elasticity of demand
What kind of income elasticity do normal goods have?
A positive income elasticity, where YED > 0
What kind of income elasticity do inferior goods have?
A negative income elasticity, where YED < 0
What is cross-price elasticity of demand?
When a change in the price of one good, can change the quantity demanded of another
What is the formula for cross-price elasticity of demand?
% change in quantity demanded of good A ÷ % change in price of good B
What does XED mean?
Cross-price elasticity of demand
If XED is positive, what are the goods?
substitutes
If XED is negative, what are the goods?
complements
What would a XED close to 0 suggest?
that the goods are unrelated
What does YED measure?
it measures the responsiveness of quantity demanded, given a change in income
What does XED measure?
it measures the responsiveness of quantity demanded of a good/service given a change in price of another
How would a perfectly inelastic demand curve look like on a diagram?
it would look vertical as the quantity demanded would be the same regardless of the price
What is the PED for perfectly inelastic demand?
PED = 0
What is perfectly elastic demand?
Where any price increase would cause demand to drop to 0
What factors affects the elasticity of demand? (4)
- availability of substitute goods/services
- percentage of income and time
- impact of subsidies
- type of good (addictive)
What is the equation for total revenue?
price per unit x quantity
If demand is inelastic, how should a firm change their price to maximize revenue?
raise their price
What is revenue?
the total amount of money brought in by a company’s operations
