1.2.3 Price, Income, and Cross Elasticies Flashcards
What is Price elasticities of demand
Measures responsiveness of quantity demanded after a change in the good’s own price
What is the basic formual for the co-efficent of Price elasticities of demand
If PED = 0
Demand is what
Pefectly inelastic
Quantity demanded does not change at all when price changed
Demand curve will be vertical
If PED is less than 1
Demand is what
% change in qty demanded smaller than % change in price
demand is price inelastic
If PED = 1
Demand is what
% change qty demanded, exactly same as % change in price
Demand is unit price elastic
If PED is greater than 1
Demand is what
demand responds more than porportiantely to price
demand is price elastic
If PED = infinty
Demand is
perfecty elastic
quantity demanded will fall to 0 if price rises
7 Factors affecting price elasticity of demand
- Number of close subsititues
- Cost of switching between prouducts
- Degree of necessity, if good is luxury or not
- Proportion of consumer’s income allocated to good
- Time period allowed following a price change
- Weather product subject to habitual consumption
- Method of payment
What is the formual to worl out total revenue
Price x quantity bought
How does price inelasticity link to revenue
rise is price leads to a rise in total revenue
How does price elasticity link to revenue
a fall in price would lead to a rise in total revenue
How does perfectly inelastic, link to revenue
a price change will lead to a proportional revenue change
6 Usefulness of Price Elasticity of Demand for Producers
Firms can use PED estimates to predict
- Effect of a change in price of total revenue of sellers
- Price volatility in a market following changes in suppy
- Effect of a change in an indirect tax on price and quantity demanded and if a business can pass tax on to the customer
- Information on PED used for price discrimination (different prices for same product)
- Where to charge a higher price and how to increase demand
What is income elasticities of Demand (YED)
Measure of the responsiveness of demand following a change in real income
What is the formula used for calculating income elasticity of demand
% change in demand / % change in income
Do Normal goods have a positive or negative YED
Positive
So as consumers’ incomes rises, more is demanded at each price
Outward shift in the demand curve
Normal mecessities have a YED between
0 and +1
Luxury goods/services have a YED of
Bigger than +1
Demand s income elastic
Do inferior goods have a positive or negative YED
Negative
Examples of inferior goods
- Own label discounters
- Urban bus transport
- Cigarettes
- Economy class travel
How can YED vary within a product range like food
YED for an own label foods is less than high-value ‘finest’ food ranges
How do business make use of estimated of YED
Explain temrs of luxury and necessity goods
Helps firms predict the effect of an econmic cycle on sale
Luxury goods with high YED will see greater sales volatility over a necessity good that are income-inelastic
As we become better off, we can afford to ……. spending on …………..
YED will also affect the pattern of …… over time
increase
different goods/service
demand
Over time, normal luxury goods, what happens to YED
And why
exceeds +1
proporition of a consumers income spent on that product will go up
Over time, what happens to the YED of inferior goods and why
As income rises, the share or proportion of their budget on these products will fall
This is becuase as income rises, demand declines and so too the share of income spend on these products
Over time, what will happen to the YED of normal necessities
as income rises, the share or proportion of their budget on these products will fall
What is cross elasticity demand (XED)
measures reponsiveness of demand for good X following a change in the price of good Y (a related good)
What is substitute good
An increase in the price of one product will lead to a rise in demand for its substitute, as consumers swap away from the more expensive good
A high value suggests both products are close substitute
Does a substitute product have a positive or negative XED
positive
What is a compliment good, in terms of good T
An increase in the price of Good T will lead to a contraction in demand for T and a fall in demand for a complement, good S
Is the XED of compilment goods positive or negative
Negative
What type of product would have a cross-price elasticity of 0 (XED)
Unrelated good
What is the relavance of XED and complement goods
Businesses may want to consider supplying complimentary goods in a bundle or close together in shops
They may also put a high mark up on one of the goods, which is sold with the other good, like printer and ink cartages
What is the relavance of XED and substitute goods
diiferent brands owned by the same company, meaning they reduce competition and dominate more of the market
