1.2.3, 1.2.5 Elasticities Flashcards
PED, PES, YED, XED
What does the price elasticity of demand (PED) measure?
PED measures the responsiveness of demand to a change in price
PED formula
PED = % change in QD / % change in P
What are the determinants of PED? (5)
- degree of necessity
- proportion of income
- substitutes/competitors
- time
- habits
If PED < -1
PED is price elastic (shallow gradient)
What does it mean when PED is price elastic?
A change in price results in a proportionately larger change in demand (e.g. any good in a competitive market)
If -1 < PED < 0
PED is price inelastic (steeper gradient)
What does it mean when PED is price inelastic?
A change in price results in a proportionately smaller change in demand (e.g. unique goods, necessities)
If PED/PES = ∞
PED/PES is perfectly elastic (horizontal curve)
What does it mean when PED/PES is perfectly elastic?
A change in price results in no demand/supply
If PED/PES = 0
PED/PES is perfectly inelastic (vertical curve)
What does it mean when PED/PES is perfectly inelastic?
A change in price results in no change in quantity demanded/supplied
If PED = -1
PED is unitary elastic
What does it mean when PED is unitary elastic?
A change in price is equal to the change in quantity demanded
What does the price elasticity of supply (PES) measure?
PES measures the responsiveness of supply to a change in price
PES formula
PES = % change in QS / % change in P
What are the determinants of PES? (5)
- number of firms in the market
- length/difficulty of production
- amount of spare capacity
- perishability
- weather
If PES > 1
PES is price elastic (shallow gradient)
What does it mean when PES is price elastic?
A change in price results in a proportionately larger change in quantity supplied
If 0 < PES < 1
PES is price inelastic (steeper gradient)
What does it mean when PES is price inelastic?
Supply is not as responsive, meaning that a change in price results in a proportionately smaller change in supply
If PES = 1
PES is unitary elastic
What does it mean when PES is unitary elastic?
A change in price is equal to the change in quantity supplied
What does the income elasticity of demand (YED) measure?
YED measures the responsiveness of demand to a change in income
YED formula
YED = % change in QD / % change in Y
If YED = positive
The good is a NORMAL GOOD
What is a normal good?
Goods that increase in demand when income level rises (positively related) [vice versa]
If YED = negative
The good is an INFERIOR GOOD
What is an inferior good?
Goods that experience increased demand when income level falls (inversely related) [vice versa]
If -1 < YED < 1
The good is a NECESSITY (YED is inelastic)
What is a necessity?
Basic goods that consumers need regardless of income level (e.g. water, clothing, food, shelter)
If YED < -1, YED > 1
The good is a LUXURY GOOD (YED is elastic)
What is a luxury good?
Goods that consumers buy if they are willing and able afford them, desirable goods (e.g. jewellery)
What does the cross price elasticity of demand (XED) measure?
XED measures the responsiveness of demand for good A to a change in price for good B
(how the price of one good affects the demand for another)
XED formula
XED = % change in QDa / % change in Pb
XED for substitute goods
Always positive (upwards sloping curve)
XED for complementary goods
Always negative (downwards sloping curve)
If XED > 1
The two goods are strong substitutes (elastic: change in Pb results in a larger change in QDa)
If 0 < XED < 1
The two goods are weak substitutes (inelastic: change in Pb results in a smaller change in QDa)
If XED < -1
The two goods are strong complements (elastic: change in Pb results in a larger change in QDa)
If -1 < XED < 0
The two goods are weak complements
(inelastic: change in Pb results in a smaller change in QDa)
