1.2.3 Flashcards
What’s the defintion of PED?
A numerical value of the change of responsiveness in demand to a change in price?
What’s the definition of YED?
A numerical value of the change in responsiveness of demand to a change in income.
What the defintion of XED?
A nunerical value of the change of responsives of good X follwing a chnage in price of good Y.
What’ s the formula of PED?
%Change in Price
What’s the formula for YED?
%Change in Income
What’s the formula for XED?
%CHNG in Price of Good Y
What type of elasticty of demand is there, when PED is greater than 1?
Relatively elastic PED.
What type of elasticty of demand is there, when PED is between 0 and 1?
Relatively inelastic PED.
What type of elasticty of demand is there, when PED is ♾️ ?
Perfectly elastic PED.
What type of elasticty of demand is there, when PED is 0?
Perfectly inelastic PED.
What type of elasticty of demand is there, when YED is above 1?
Income elastic YED.
What type of elasticty of demand is there, when YED is below 1?
Income inelastic YED.
What type of elasticty of demand is there, when YED is 0?
Perfectly inelastic YED.
For YED, what type of good has a YED between 0 and 1?
Normal goods
For YED, what type of good has a YED below 0?
Inferior goods.
For YED, what type of good has a YED above 1?
A luxury good.
For XED, what is the type of good when the XED is positive?
Substitute.
For XED, what is the type of good when the XED is negative?
Complements.
Name 2 factors affecting elasticities price elasticty of demand and explain how
Availability of substitutes
- More of them = more price elastic - consumers switch easier when price changes but depends on how close/far substitute is
Time
- Long-run = PED becomes more price elastic - consumer can switch up but depends on consumer behaviour
Why is it siginificant for firms to know the XED of their goods in terms of changes in price to substitues and complementary goods?
*whole chain of analysis as well
They can react quicker to changes in price of related products.
This allows them to maximise demand for their products.
For example, if a substitue’s price changes, the firm may lower the price of their own good to reduce the impact to demand.
Why is it siginificant for firms to know the YED of their goods in terms of changes in income?
They can forecast their sales if YED and possible changes to income are known.
Why is it siginificant for the government to know the YED of goods when placing taxes and subsidies?
XED can be used for pricing policy for the government.
A reduction in price for a normal good, when there’s an expected faill in incomes can limit the fall in demand.
This means firms can still make a profit therefore government still has tax revenue.
For PED, when the good has elastic demand, what happens to total revenue when there’s a reduction in price?
A reduction in price causes an increase in the firm’s total revenue.
For PED, when the good has elastic demand, what happens to total revenue when there’s an increase in price?
An increase in price causes a decrease in the firm’s total revenue,
For PED, when the good has inelastic demand, what happens to total revenue when there’s a reduction in price?
A reduction in price causes a reduction in the firm’s total revenue.
For PED, when the good has inelastic demand, what happens to total revenue when there’s an increase in price?
An increase in price causes an increase in the firm’s total revenue.
