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Econ AS > 1.2.3 + 1.2.4 + 1.2.5 > Flashcards

1.2.3 + 1.2.4 + 1.2.5 Flashcards

1
Q

price elasticity of demand (PED) measures :

A

responsiveness of quantity demanded for a product after a change in the good’s own price.

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2
Q

formula for calculating co efficient of PED

A

%change in quantity demanded / %change in price

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3
Q

PED = 0 means

A

perfectly inelastic – i.e. demand does not change at all when the price changes – the demand curve is drawn as vertical.

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4
Q

PED between 0 and -1

A

If PED is between 0 and -1 (% change in quantity demanded from A to B is smaller than the % change price), demand is price inelastic.

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5
Q

if PED = -1

A

If Ped = -1 (the % change in quantity demanded is exactly the same as the % change in price), demand is unit price elastic. A 15% rise in price = 15% contraction in demand

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6
Q

If Ped is between -1 and -∞,

A

demand is price elastic

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7
Q

If Ped = ∞

A

then demand is perfectly elastic – quantity demanded will fall to zero if the price rises – the demand curve will be drawn as horizontal

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8
Q

What are the main factors that influence the coefficient of price elasticity of demand for a product?

A
  • Number of close substitutes
  • Time available
  • Degree of necessity
  • % of total expenditure
  • addictive ness,
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9
Q

price inelastic relationship with revenue

A
  • price inelastic, a rise in price leads to a rise in total revenue – for example, 20% rise in price might cause demand to contract by only 5% (-0.25)
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10
Q

price elastic demand relationship with revenue

A

price elastic, a fall in price leads to a rise in total revenue - for example, a 10% fall in price might cause demand to expand by 25% (i.e. PED = +2.5).

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11
Q

price perfectly inelastic demand relationship with revenue

A

perfectly inelastic (PED=0), a given price change will result in the same revenue change, for example, a 5 % increase in a firm’s prices results in a 5 % increase in its total revenue since demand is unchanged.

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12
Q

As we move from left to right along the demand curve, PED becomes

A

increasingly price inelastic, this is because the % change in price increases as you go along, but the change in quantity demanded is increasing

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13
Q

Firms can use PED estimates to predict:

A
  • Effect of a change in price on their total revenue. (Total revenue = price per unit x quantity sold)
  • Price volatility in a market following changes in supply
  • Effect of a change in an indirect tax on price and quantity demanded
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14
Q

what is income elasticity of demand?

A

Income elasticity of demand (YED) measures the relationship between a change in demand following a change in the real income of consumers.

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15
Q

formula for YED - income elasticity of demand

A

Percentage change in demand divided by the percentage change in income.

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16
Q

normal goods and YED

A

positive income elasticity of demand so as consumers’ income rises, more is demanded at each price i.e. there is an outward shift of the demand curve.

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17
Q

normal necessities and YED

A

Normal necessities have an income elasticity of demand between 0 and +1 for example, if income increases by 10% and demand for fresh fruit increases by 4%, income elasticity is +0.4. Demand is rising less than proportionately to income – demand is income inelastic.

18
Q

luxury goods and services and YED

A

Luxury goods and services have an income elasticity of demand > +1 i.e. demand rises more than proportionate to a change in income – for example an 8% increase in income might lead to a 10% rise in demand for new kitchens. Income elasticity of demand in this example is +1.25 - demand is income elastic.

19
Q

inferior goods and YED

A

Inferior goods have a negative income elasticity of demand meaning that demand falls as income rises

20
Q

Cross-price elasticity of demand (XED) + formula

A

measures the responsiveness of demand for good X following a change in the price of good Y (where Y is a related good
%change of demand of product X / % change in price of product Y
Eg, unrelated good = 0

21
Q

what does XED allow a distinction between?

A

substitute and complementary goods

22
Q

substitute goods XED

A

positive cross price elasticity of demand. (I.e. XED > 0) which means that an increase in the price of one product will lead to a rise in demand for its substitute

23
Q

complementary goods XED

A

When there is a strong complementary relationship, cross elasticity of demand (XED) 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.

24
Q

supply definition

A

Supply is the quantity of a good or service that producers are willing and able to supply at a given price in a given time period.

25
Q

law of supply

A

The law of supply is that as price rises, so businesses expand supply. This is because higher prices provide a profit incentive for firms to expand production to meet growing demand

26
Q

a supply curve shows a relationship between :

A

market price and how much a firm is willing and able to sell

27
Q

price rise/fall = ____ in supply

A

rise = expansion

fall in price = contraction in supply

28
Q

three key reasons why supply curves are drawn as sloping up from left to right giving a positive relationship between market price and quantity supplied

A
  1. Profit motive
  2. Higher prices - more firms enter - more output - more supply
  3. Higher production = use more resources = higher costs = only if prices are rising to maintain profit margins
29
Q

key factors that can cause a shift in the supply curve:

A
  • Changes in production costs
  • changes in technology
  • government taxes and subsidies and regulations
  • changes in climate for agricultural industries
  • change in prices of substitute
  • number of firms in the market
30
Q

how can changes in production costs affect the supply curve?

A

a. Lower costs mean that a business can supply more at each price
b. rise in price of raw materials or higher wages, then businesses cannot supply as much at the same price and this will cause an inward shift of the supply curve.
c. A fall in the exchange rate causes an increase in prices of imported components and raw materials

31
Q

supply shock definition + example

A

A supply shock occurs when an outside event has an impact on the ability of producers to supply goods and services to a market.

  • flood, pandemic, tsunami
32
Q

what is joint supply

A

Joint supply is where an increase or decrease in the supply of one good leads to an increase or decrease in supply of a by-product.

lamb and wool

33
Q

What is price elasticity of supply? (PES)

A

Price elasticity of supply (PES) measures the relationship between change in quantity supplied and a change in price.

34
Q

If supply is price elastic

A

producers can increase their output without a rise in cost or a time delay.

35
Q

If supply is price inelastic

A

firms find it hard to change their production in a given time period.

36
Q

Formula for price elasticity of supply

A

% change in quantity supplied divided by the % change in price

37
Q

Values of the coefficient of price elasticity of supply

A
  • When PES > +1, supply is price elastic.
  • When PES < 1, supply is price inelastic.
  • When PES = 0, supply is perfectly inelastic (and the supply curve is drawn vertically).
  • When PES = infinity, supply is perfectly elastic (and the supply curve is drawn horizontally).
38
Q

if it is perfectly elastic supply

horizontal

A

an increase in demand can be met without any change in market price

39
Q

if it is perfectly inelastic supply

vertical

A

supply fixed and does not respond to a change in the market price

40
Q

Factors that affect price elasticity of supply

A
  • level of spare capacity - can increase to max if needed
  • Stocks - can change output - elastic
  • perishability - will product rot/ decay over time
  • Time - less time to stockpile - can’t change output in relation to price
41
Q

XED formula example

A

if airplane1 price 1000, and had 200 q demanded, and airplane 2 is the exact same, and airplane 1 decides to raise prices by 5% to 1050, ceteris paribus 200 will become 0 demanded and airplane 2 will have a price off 1000 and demand gone from 200-> 400, which is a 100% increase XED WILL BE 100/5 = 20%

42
Q

Why is income elasticity of demand(YED) important?

A
  • important for businesses to know how sales will be affecte by changes of income in the population
  • may have an impact on which people of good a firm produces

Econ AS (16 decks)

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