1.2.3 Elasticity of demand Flashcards
Define PED?
Desribe the numbers as well
The responsiveness of demand to a change in price.
PRICE INELASTIC = <1 = more vertical demand line
PRICE ELASTIC = >1 = more horizontal demand line
Formula for PED?
How do you calculate revenue?
Price X Quantity
What determines the PED?
- Number and closeness of subsitutes
- Proportion of income spent on good
- Easier it is to postpone purchase (ie holiday)
- Time period
- Addictiveness
What is XED
Cross elasticity of demand - the responsiveness in the quantity demanded of one product to a change in the price of another.
What is YED
responsiveness of qty demanded in response to change in income.
What is Unitary elastic?
Where PED = 1: Quantity demanded changes by exactly the same % as price.
What is relatively elastic?
Where PED > 1 : Quantity demanded changes by a larger % than price so demand is relatively responsive to price.
What is relatively inelastic?
Where PED < 1: quantity demanded changes by a smaller % than price so demand is relatively unresponsive to price.
What is perfectly inelastic?
Where PED = 0: A change in price has no effect on output so demand is completley unresponsive to price.
What is perfectly elastic?
PED = infinity: A change in price means that quantity falls to 0 and demand is very responsive to price.
What is the sigificance of PED?
Determines the effects of indirect taxes and subsidies.
The more elastic the demand curve, the lower the incidence of tax on the consumer. This means that when PED is elastic, a tax will only lead to a small rise in price as producers have to take on the burden themselves because if they pass on all the costs then demand will fall.
What will happen to tax when demand is inelastic
Tax mainly passed onto consumer since consumers are relatively unresponsive to the price of this good, quantity demanded will not fall by a large amount. This means tax will be ineffective at reducing output. It does mean there is higher tax revenue for the government.
The more inelastic the demand curve, the higher the tax revenue for the government.
How do you calculate YED
% change in QTY demanded
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% change in income
What is a negative YED
When YED < 0 - A rise in income will lead to fall in demand
Usually Inferior goods = IE tesco beans
.
What YED is a normal good?
When YED > 0 - A rise in income will lead to a rise in demand for the good.
What YED is a luxury good?
A type of normal good but YED > 1
What is the significance of YED?
Shows how sales will be affected by changes in the income of the population. It many have an impact on the type of goods that a firm produces.
XED forumla?
% change in qty demanded of A
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% change in price of B
What XED do subsitutes have?
XED > 0
What XED do complementary goods have?
XED < 0
What XED do unrelated goods have?
XED = 0
Significance of XED?
They need to know how price changes by other firms will impact them so they can take appropriate action.
