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

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2
Q

What does PeD tell us?

A

the responsiveness of Qd to a change in price

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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
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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
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5
Q

Formulae for PeD

A

%ΔQd (Q2 - Q1) / Q1
———– OR ———————-
%ΔP (P2 - P1) / P1

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6
Q
A
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