1.2.3 - elasticities Flashcards
what is the formula for Price elasticity of demand?
% change in Q.D. / % change in price
numerical figure to show that it is elastic demand?
> 1
numerical figure to show that it is inelastic demand?
between 0 and 1
numerical figure to show that it is unitary elastic?
1
perfectly inelastic demand =
0
perfectly elastic demand =
infinity
factors that determine the PED of a product
- number of close substitutes available for consumers
- price of the product in relation to income
- cost of substituting between different products
- brand loyalty and habitual consumption
- degree of necessity/ luxury
XED formula
% change in Q.D. of good A / % change in price of good B
what type of demand are substitutes in?
competitive demand
what type of demand are complements in?
joint demand
is the value of XED for substitutes positive or negative?
positive
what is the XED value for substitutes?
> 0
what happens to demand in relation to two substitutes?
as demand for one rises, demand for the other falls
is the XED value for complements positive or negative?
negative
what is the XED value for complements?
< 0
what happens to the demand for complements in relation to each other?
as demand for one rises, demand for the other one also rises
what happens to the demand for close substitutes?
when there is a small rise in price of X this causes a large rise in demand for Y
what happens to the demand for weak substitutes?
A large rise in price of X leads to a small increase in demand for Y
what happens to the demand for close complements?
when there is a small fall in price of X this causes a large rise in demand for Y
what to happens to the demand for weak complements?
a large drop in price of X causes only a small rise in demand for Y
is the demand curve for substitutes upward or downward sloping?
downward sloping
is the demand curve for complements upward or downward sloping?
upward sloping
YED formula
% change in Q.D / % change in real income
what type of income elasticity do normal goods have?
positive (YED = >0)
what is the income elasticity for luxury goods?
> +1
what is the income elasticity for necessities?
> 0 and < +1
what type of income elasticity do inferior goods have?
negative (YED = < 0)
why are inferior goods counter cyclical goods?
demand rises in a recession but demand falls during a boom
for inferior goods what happens to demand as incomes increase?
as income increases less of the good is demanded
for normal goods what happens to demand as income increases?
as income increases more of the good is demanded
are normal necessities income elastic or inelastic?
income inelastic
are normal luxuries income elastic or inelastic?
income elastic
when demand is inelastic who has to pay more tax?
consumers
when demand is elastic who has to pay more tax?
producers/suppliers
when subsidies are given in inelastic demand who has less gain?
producers gain less, consumers gain more
when subsidies are given in elastic demand who has less gain?
consumers gain less, producers gain more
