1.2.3 PED YED XED PES Flashcards
what is elasticity?
it’s the responsiveness of one vairable to changes in another
what are the types of elasticity?
price elasticity of demand PED
Income elasticity of demand YED
cross elasticity XED
Price elasticity of supply PES
what is the price elasticity of demand PED?
it measures the responsiveness of the quantity demanded when there is a change in price
How to calculate PED?
Queue before you pee
percentage change of Qd/Percentage change of price
What happens if PED value is > than 1
Demand is price-elastic
as there is a greater proportionate change in quantity demanded eg price goes down 5 percent but Qd up 15 percent.
what happens if PED value is < than 1
Demand is price inelastic
this means as price changes Qd will change but proportionally smaller/less
eg price goes down 5 percent but Qd up 1 percent
what happens if PED value is 0
it is perfectly inelastic demand
this means regardless of price change Qd wont change.
what happens if the PED value is infinite?
this is extreme case
Demand is perfectly price-elastic
it’s a extreme case of responsiveness
any price change will lead to total collapse of demand
what happens if PED value is 1?
this is extreme case
it means demand is unit price elastic(unitary)
-Qd changes in exact proportion as price change
E.G Price change of 5 percent leads to a 5 percent change in Qd
When is demand for a good/service price elastic or inelastic?
basically, list the determinants of PED?
SPLAT
-Substitutes (num of them) if there are more subs then demand is going to be price elastic (vice versa)
e.g oil has fewer subs so it has price inelastic demand
-Percentage of income: if the percentage of income is greater that a price change takes the more price elastic demand is going to be(vice versa)e.g 10% percent increase in car price takes a chunk of income.
-Luxury/Necessity
Luxuries have more price-elastic demand
necessities have more price inelastic demand.
-Addictive habitual consumption
addictive goods are price inelastic
-Time period
Short run demand is price inelastic as consumers don’t have time to look at alternatives.
Long run is elastic as more subs become avaliable
what is YED?
income elasticity of demand
measures the responsiveness of quantity demanded for a good when income changes
what is the equation for YED?
Quiy memory device
percentage change of Qd/percentage change in income
In YED what does it mean when a figure is + or minus?
if + its a normal good (positive)
if - its a inferior good (negative)
what happens if normal good is > 1
what happens if normal good < 1
demand is income elastic normal luxury
demand is income inelastic normal necessity
what happens if inferior good is > 1
what happens if inferior good is < 1
what happens if income is 0
demand is income-elastic
demand is income inelastic
demand is perfectly income inelastic
what is the cross elasticity of demand XED?
it measures the responsiveness of quantity demanded of a good/service given a change in the price of another.
how to calculate XED?
Quantity of Good A/Price of good B = XED of A with respect to B
What does it mean if XED figure is positive or negative?
if positive its substitutes good
if negative its a complement good
what happens if the XED value is greater than 1?
what happens if XED value is less than 1?
if greater than 1 demand between the goods is price elastic meaning their strongly related.
if less than 1 demand between the goods is price inelastic meaning they have a weak relationship.
what happens if XED value is 0?
if value is 0 demand between goods is perfectly price inelastic meaning there is no relationship between them.
what does it mean if XED value is closer to zero or further away from zero?
closer to zero = weak relationship
further from zero = strong relationship
zero = no relationship
what is the price elasticity of supply PES?
it measures the responsiveness of the quantity supplied when there is a change in price.
how to calculate PES?
queue before you pee
percentage change of Qs/Percentage change in price
why is PES always a positive number?
this is due to the law of supply as price goes up supply increases as 2 positives make a positive.
and as the price goes down supply goes down as to minus makes a positive.
how does the PES curve look like?
its upward sloping
what are the determinants of PES?
Pssst
Production Lag: The longer it is for g/s the more price inelastic supply is (agriculture).
stocks: if stock high supply is price elastic as its more responsive (and vice versa)
Spare capacity: The more space there is, the more price-elastic supply will be, as firms can utilize spare capacity if price and demand go up.
substitutability of FOPs: if there are more of them in a business, it will be easier to respond. eg printing press can change production.
time:
Short-run supply is price inelastic as one or two FOPs are fixed so harder to increase production
