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Sutherland > 1.2 How markets work- Elasticity > Flashcards

1.2 How markets work- Elasticity Flashcards

1
Q

Elasticity is

A

How responsive supply and demand is to changes in price and income

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2
Q

Price Elastic is

A

When the change in demand is greater than the change in price

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3
Q

Price inelastic is

A

When the change in demand is less than the change in price

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4
Q

Elastic is

A

When the changes in price or income affect demand

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5
Q

Inelastic is

A

When the changes in price and income doesn’t affect demand
-Usually necessary goods

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6
Q

1.Perfectly inelastic
2.Inelastic
3.Unitary elastic
4.Elastic
5.Perfectly Elastic

A
  1. Zero
  2. Less than 1
  3. 1
  4. More than 1
  5. Infinity
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7
Q

Equation of PED- Price elasticity of demand

A

%change in quantity demand / %change in price

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8
Q

Equation of YED- Income elasticity of demand

A

%change in quantity demand / %change in income

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9
Q

Equation of XED- Cross Price elasticity of demand

A

%change in quantity demand of good A / %change in price of good B

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10
Q

Equation of PES- Price elasticity of supply

A

%change in quantity supplied / %change in price

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11
Q

Percentage change is

A

Change / original x100

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12
Q

What affects the price elasticity of demand (5)

A
  1. Number of substitutes
  2. Time- (we will find away around the product or price if it is always inelastic/ The more time the more elastic a product gets)
  3. Whether it is necessity or luxury
  4. The % of consumers income allocated to spending on the good
  5. The cost of switching between products
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13
Q

Revenue calculation

A

Selling price x Quantity

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14
Q

When a good/service is elastic should you put prices up or down

A

You should put prices down
Decrease price - Increase demand

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15
Q

When a good/service is inelastic should you put prices up or down

A

Put prices up
Price increases - demand increases/stays the same

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16
Q

Limitations of price elasticity of demand

A
  • You can only drop your price to a certain amount otherwise you will lose profit
  • Values are based on estimates
  • The Info that can be used to calculate can become outdated
  • The elasticity will change overtime so the calculation will only be useful in the short term
17
Q

Uses of price elasticity of demand

A
  • Helps firms to determine the optimum price to charge
  • Helps firms to decide if they should increase or decrease prices
  • Can only be used to calculate the impact of a change of price on sales revenue
  • Helps a firm decide on non-price strategies for increasing demand
18
Q

Factors affecting price elasticity of demand

A
  1. Availability of close substitutes
  2. Cost of switching suppliers
  3. Breadth of definition of product
  4. Degree of necessity
  5. Time frame when making a choice
  6. Brand loyalty
    7.Percentage of income spent on a product
    8.Habitual demand
19
Q

(YED)normal luxury goods
-YED number
-What happens to the product as incomes rise

A

-Income elasticity of demand exceeds +1
-As incomes rise, the proportion
of a consumer’s income spent on that product will go up.

20
Q

(YED)normal necessities
-YED
-What happens to the product as incomes rise

A

-income elasticity of demand is positive but less than 1
–As income rises, the share or proportion of their budget on these products will fall

21
Q

(YED)inferior goods
-What happens to the product as incomes rise

A

-As income rises, demand declines and so too will the share of income spent on inferior products.

22
Q

(YED)Normal goods
-What happens to the product as incomes rise

A

-Income rises, more is demanded at each price
i.e. there is an outward shift of the demand curve

23
Q

(YED)Inferior goods

A

-As incomes rise, demand falls

24
Q

(YED)Luxury good

A

-As incomes rise, demand rises

25
Q

Cross elasticity of demand (XED) measures

A

-Responsiveness of demand for good X following a change in the price of good Y (a related good).

26
Q

(XED)Substitutes:

A

Substitutes have a positive cross price elasticity of demand. An increase in the price of one product will lead to a rise in demand for its substitute, as consumers swap away from the more expensive good. A high value suggests both products are close substitutes.

27
Q

(XED)Complements:

A

When there is a strong complementary relationship, cross elasticity will be negative. An increase in the price of Good T will lead to a contraction in demand for T and a fall in demand for a complement, good S.

28
Q

(XED)Unrelated products:

A

Unrelated products have zero cross price elasticity of demand

29
Q

Uses of XED

A

helps classify goods as complementary or substitutes
-helps determine price point

30
Q

YED measures…

A

How responsive quantity demanded is to changes in income.

31
Q

Price elasticity of supply measures

A

How responsive quantity supplied is to changes in price

32
Q

The higher the number of PES

A

the more price elastic the supply is

33
Q

What is price elasticity of supply affected by

A

-availability of producer substitutes
-TIME BASED FACTORS:
-Many substitutes = high elasticity
-Few substitutes = inelastic
-The longer it takes to make the product more inelastic supply
-The shorter it takes the more elastic
-High capacity = inelastic supply
-Low capacity = elastic supply
-If it is hard to stock then PES is inelastic

34
Q

What are the uses of PES

A

-firms want to be able to respond quickly to changes in price and demand
-to do so they need to make their supply as elastic as possible
-they will then take measures to improve the elasticity of their supply

35
Q

Limitations of PES

A

-values are based of estimates
-info used to calculator PES may become outdated
-other factors may shift the supply curve cancelling the QS affect
-PES ignores any cost data
-the elasticity is likely to change over time so the calculation is only useful in the short term

Sutherland (9 decks)

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