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9EC0 A-Level Microeconomics > 1.2.3, 1.2.5 Elasticities > Flashcards

1.2.3, 1.2.5 Elasticities Flashcards

PED, PES, YED, XED

1
Q

What does the price elasticity of demand (PED) measure?

A

PED measures the responsiveness of demand to a change in price

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2
Q

PED formula

A

PED = % change in QD / % change in P

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3
Q

What are the determinants of PED? (5)

A
  • degree of necessity
  • proportion of income
  • substitutes/competitors
  • time
  • habits
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4
Q

If PED < -1

A

PED is price elastic (shallow gradient)

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5
Q

What does it mean when PED is price elastic?

A

A change in price results in a proportionately larger change in demand (e.g. any good in a competitive market)

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6
Q

If -1 < PED < 0

A

PED is price inelastic (steeper gradient)

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7
Q

What does it mean when PED is price inelastic?

A

A change in price results in a proportionately smaller change in demand (e.g. unique goods, necessities)

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8
Q

If PED/PES = ∞

A

PED/PES is perfectly elastic (horizontal curve)

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9
Q

What does it mean when PED/PES is perfectly elastic?

A

A change in price results in no demand/supply

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10
Q

If PED/PES = 0

A

PED/PES is perfectly inelastic (vertical curve)

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11
Q

What does it mean when PED/PES is perfectly inelastic?

A

A change in price results in no change in quantity demanded/supplied

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12
Q

If PED = -1

A

PED is unitary elastic

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13
Q

What does it mean when PED is unitary elastic?

A

A change in price is equal to the change in quantity demanded

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14
Q

What does the price elasticity of supply (PES) measure?

A

PES measures the responsiveness of supply to a change in price

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15
Q

PES formula

A

PES = % change in QS / % change in P

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16
Q

What are the determinants of PES? (5)

A
  • number of firms in the market
  • length/difficulty of production
  • amount of spare capacity
  • perishability
  • weather
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17
Q

If PES > 1

A

PES is price elastic (shallow gradient)

18
Q

What does it mean when PES is price elastic?

A

A change in price results in a proportionately larger change in quantity supplied

19
Q

If 0 < PES < 1

A

PES is price inelastic (steeper gradient)

20
Q

What does it mean when PES is price inelastic?

A

Supply is not as responsive, meaning that a change in price results in a proportionately smaller change in supply

21
Q

If PES = 1

A

PES is unitary elastic

22
Q

What does it mean when PES is unitary elastic?

A

A change in price is equal to the change in quantity supplied

23
Q

What does the income elasticity of demand (YED) measure?

A

YED measures the responsiveness of demand to a change in income

24
Q

YED formula

A

YED = % change in QD / % change in Y

25
Q

If YED = positive

A

The good is a NORMAL GOOD

26
Q

What is a normal good?

A

Goods that increase in demand when income level rises (positively related) [vice versa]

27
Q

If YED = negative

A

The good is an INFERIOR GOOD

28
Q

What is an inferior good?

A

Goods that experience increased demand when income level falls (inversely related) [vice versa]

29
Q

If -1 < YED < 1

A

The good is a NECESSITY (YED is inelastic)

30
Q

What is a necessity?

A

Basic goods that consumers need regardless of income level (e.g. water, clothing, food, shelter)

31
Q

If YED < -1, YED > 1

A

The good is a LUXURY GOOD (YED is elastic)

32
Q

What is a luxury good?

A

Goods that consumers buy if they are willing and able afford them, desirable goods (e.g. jewellery)

33
Q

What does the cross price elasticity of demand (XED) measure?

A

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)

34
Q

XED formula

A

XED = % change in QDa / % change in Pb

35
Q

XED for substitute goods

A

Always positive (upwards sloping curve)

36
Q

XED for complementary goods

A

Always negative (downwards sloping curve)

37
Q

If XED > 1

A

The two goods are strong substitutes (elastic: change in Pb results in a larger change in QDa)

38
Q

If 0 < XED < 1

A

The two goods are weak substitutes (inelastic: change in Pb results in a smaller change in QDa)

39
Q

If XED < -1

A

The two goods are strong complements (elastic: change in Pb results in a larger change in QDa)

40
Q

If -1 < XED < 0

A

The two goods are weak complements
(inelastic: change in Pb results in a smaller change in QDa)

9EC0 A-Level Microeconomics (19 decks)

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