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
Complementary goods
They have negative XED. If one good becomes more expensive, the quantity demanded for both goods falls
Substitutes
Cross elasticity of demand XED is positive.
Demand curve is upwards sloping
Unrelated goods
Cross elasticity of demand =0
