1.2.3 Price, income and cross elasticities of demand Flashcards
1
Q
Elastic vs Inelastic
A
Elastic - responsive to price changes
Inelastic - unresponsive to price changes
2
Q
What does PeD tell us?
A
the responsiveness of Qd to a change in price
3
Q
Price is elastic when:
A
- the good is not necessary
- there are lots of substitutes
- unbranded (homogenous)
- customer has long time span
- high proportion of spending
4
Q
Price is inelastic when:
A
- the good is necessary
- strong brand (differentiated)
- customer has short time span
- low proportion of overall spending
- Habit forming/ addictive
5
Q
Formulae for PeD
A
%ΔQd (Q2 - Q1) / Q1
———– OR ———————-
%ΔP (P2 - P1) / P1
6
Q
A