1.2.3 Flashcards
Price elasticity of demand
The responsiveness of a change in demand to a change in price
Formula for PED
PED= %change in QD/ %change in P
Price elastic good
Very responsive to a change in price
PED>1
Price inelastic good
Demand that is ultimately unresponsive to change in price
PED<1
Unitary elastic good
Change in demand equal to change in price
PED=1
It’s a curve
Perfectly inelastic good
Demand does not change when p changes
PED=0
Perfectly elastic good
Demand falls to 0 when p changes
PED = infinity
Factors influencing PED
NSAPDP
Necessity
Substitutes
Addictiveness
Proportuon of income spent on good
Durability of good
Peak and off- peak times
Subsidy
A payment from the government to firms to encourage the production of a good/service to lower their average costs
Total revenue
If a good has inelastic demand, a firm can raise its price and quantity sold will not fall significantly, which increases total revenue
TR=Ptimes Q
Income elasticity of demand
Responsiveness of a change in demand to a change in income
%change in QD/ %change in y
Inferior goods
Goods which. See a fall in demand as income increases
PED<0
Normal goods
Demand increases as income increases.
PED>0
Luxury goods
Increase in income results in a significant increase in demand
YED>1
Cross elasticity of demand
Responsiveness to a change in demand of one goodX to a change in another good Y
XED= %change in QD of X/ %change in price of Y
