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Economics 1.2 - How markets work > 1.2.3 - price, income and cross elasticities of demand > Flashcards

1.2.3 - price, income and cross elasticities of demand Flashcards

1
Q

How do you calculate PED?

A

% change in quantity demanded / % change in price

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2
Q

What is PED?

A

A measure of the responsiveness of quantity demanded to a change in price.

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3
Q

Why is PED almost always negative?

A

The Law of Demand says there is an inverse relationship between price and quantity demanded.

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4
Q

How do economists determine the elasticity from the value of PED?

A

E > 1 elastic
E < 1 inelastic
E = 1 unit elastic

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5
Q

What does perfectly elastic mean?

A

The percentage change in quantity demanded is infinite.
Value - infinity
Graph - horizontal line from the y axis

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6
Q

What does elastic mean?

A

The percentage change in quantity demanded is greater than the percentage change in price.
Value > 1
Graph - Downwards sloping from the y axis

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7
Q

What does unit elastic mean?

A

The percentage change in quantity demanded is equal to the percentage change in price
Value = 1
Graph - Reciprocal graph

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8
Q

What does inelastic mean?

A

The percentage change in quantity demanded is less than the percentage change in price
Value < 1
Graph - Sloping downwards from x axis

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9
Q

What does perfectly inelastic mean?

A

There is no change in quantity demanded
Value = 0
Graph - Vertical line from the x axis

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10
Q

What factors determine the PED?

A

TWIST
T - type of good
W - width of definition
I - income
S - substitutes
T - time

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11
Q

How does type of good affect the PED?

A

Habit forming goods eg. cigs have inelastic PEDs, the buyer is de-sensitised to changes in price
Necessities have inelastic PED as price rises only marginally reduce consumption of basic items
Luxuries have elastic PED as consumers are more likely to react to price changes of non-essential items

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12
Q

How does width of definition affect PED?

A

The broader the definition (more substitutes), the more inelastic the PED.

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13
Q

How does income affect PED?

A

The smaller the proportion of income spent on a good/service the more inelastic the PED.

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14
Q

How do substitutes affect PED?

A

The number, closeness and availability of substitutes influence PED. A large number of substitutes make the PED more elastic but a lack of substitutes make the PED more inelastic.

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15
Q

How does time affect PED?

A

PED tends to be more elastic in the long run as it takes time for consumers to adjust spending habits and find alternatives. PED is inelastic in the short run. Also, more substitutes can be developed over time.

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16
Q

How does changing the price affect the total revenue of an inelastic good?

A

Increasing price = increased total revenue
Decreasing price = decreased total revenue

17
Q

How does changing the price affect the total revenue of an elastic good?

A

Increasing price = decreased total revenue
Decreasing price = increased total revenue

18
Q

What is XED?

A

Measures the sensitivity of the quantity demanded of one good to a change in price of another,

19
Q

How do you calculate XED?

A

% change in quantity demanded of A / % change in price of B

20
Q

What type of XED do complements and substitutes have?

A

Substitutes have a positive XED, complements have a negative XED.

21
Q

What is joint demand?

A

Complements are jointly demanded. A change in the price of one will cause a change in demand of the other.

22
Q

What is competitive demand?

A

Close substitutes are in competitive demand. Demand for one varies directly with price of the other. eg. a decrease in the price of margarine causes a fall in the demand for butter

23
Q

What is composite demand?

A

A good/service is said to be in composite demand when its required for different uses. eg. increased demand for blankets (wool) will impact the price of wool socks.

24
Q

What is joint supply?

A

Production of one good automatically leads to production of another. eg. production of lamb leads to supply of wool. An increase in demand for one causes a fall in price of the other

25
Q

What is YED?

A

Measures the sensitivity of quantity demanded to a change in income.

26
Q

How do you calculate YED?

A

% change in quantity demanded / % change in income

27
Q

How do you find the income elasticity from the value?

A

Normal goods have a positive YED:
E > 1 elastic or a luxury
E < 1 inelastic or a necessity
Inferior or giffen goods have a negative YED

Economics 1.2 - How markets work (9 decks)

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