1.2.3 - Price, Income & Cross Elasticities Of Demand Flashcards
What Is The Law Of Demand?
States that when there is an increase in price, there will be a fall in QD.
What Is PED?
Measures the responsiveness of QD given a change in price.
How Do You Calculate PED?
%∆QD / %∆P
How Do You Calculate %∆?
Difference / Original x 100
What Will The Outcome Be Once You Have Calculated PED?
Always negative.
If The PED Value Is Greater Than 1, What Is It?
Demand is price elastic.
What Is Meant When Demand Is Price Elastic?
For any given price change, there is a greater proportionate change in QD.
If The PED Value Is Less Than 1, What Is It?
Demand is price inelastic.
What Is Meant When Demand Is Price Inelastic?
When the price changes, QD will change proportionally less than the change in price.
If The PED Value Is 0, What Is It?
Demand is perfectly price inelastic.
What Is Meant When Demand Is Perfectly Price Inelastic?
Regardless of the price change, QD won’t change at all.
If The PED Value Is ∞, What Is It?
Demand is perfectly price elastic.
What Is Meant When Demand Is Perfectly Price Elastic?
A change in price means that quantity falls to 0.
If The PED Value Is 1, What Is It?
Demand is unit price elastic.
What Is Meant When Demand Is Unit Price Elastic?
QD changes by a smaller % than price.
What Is The Mnemonic Used For Factors That Influence PED?
SPLAT.
What Does SPLAT Stand For?
Substitutes (No).
Percentage of income.
Luxury / Necessity.
Addictive / Habit forming.
Time period.
If There Are More Substitutes Available, What Will The PED Be?
(2 Points)
~ More = Elastic.
~ Less = Inelastic.
If There Is A Greater Percentage Of Income That A Price Change Takes, What Will The PED Be?
(2 Points)
~ Greater = Elastic.
~ Less = Inelastic.
If The Good Is A Luxury Or Necessity, What Will The PED Be?
(2 Points)
~ Luxury = Elastic.
~ Necessity = Inelastic.
If The Good Is Addictive Or Habit Forming, What Will The PED Be?
(2 Points)
~ Addictive = Inelastic.
~ Habit Forming = Inelastic.
In The SR Or LR, What Will The PED Be?
(2 Points)
~ SR = Inelastic.
~ LR = Elastic.
What Is YED?
Measures the responsiveness of QD given a change in income.
How Do You Calculate YED?
%∆QD / %∆Y
What Type Of Relationship Does A Normal Good Have Between Income & Demand?
(2 Positive)
~ Positive.
~ As income rises, demand goes up. Vice versa.
What Type Of Relationship Does An Inferior Good Have Between Income & Demand?
(2 Positive)
~ Negative / Inverse.
~ As income rise, demand falls. Vice versa.
If The YED Figure Is Positive, What Type Of Good Is It?
Normal good.
If The YED Figure Is Negative, What Type Of Good Is It?
Inferior good.
If The Normal Good YED Figure Is Greater Than 1, What Is It?
(2 Points)
~ Demand is income elastic.
~ Normal luxury.
If The Normal Good YED Figure Is Less Than 1, What Is It?
(2 Points)
~ Demand is income inelastic.
~ Normal necessity.
If The Inferior Good YED Figure Is Greater Than 1, What Is It?
Demand is income elastic.
If The Inferior Good YED Figure Is Less Than 1, What Is It?
Demand is income inelastic.
If The YED Figure Is 0, What Is It?
Perfectly income inelastic.
What Are The Factors That Influence YED?
(3 Points)
~ Economic state.
~ Minimum wage legislation.
~ Taxation.
What Is XED?
Measures the responsiveness of QD of a good / service given a change in price of another.
How Do You Calculate XED?
%∆QDa / %∆Pb
If The XED Figure Is Positive, What Does This Mean?
The 2 goods are substitute goods.
If The XED Figure Is Negative, What Does This Mean?
The 2 goods are complement goods.
What Is The Mnemonic For XED?
(3 Points)
~ Party Season Near Christmas.
~ Positive = Substitutes.
~ Negative = Complements.
If The XED Value Is Greater Than 1, What Is It?
(3 Points)
~ Demand between the goods is price elastic.
~ When the price of one good changes, QD of the other will change proportionally more than the change in price of the other.
~ Strongly related goods.
If The XED Value Is Less Than 1, What Is It?
(3 Points)
~ Demand between the goods is price inelastic.
~ As the price of one good changes, QD of the other will change by proportionally less then the change in price of the first good.
~ Weakly related goods.
If The XED Value Is 0, What Is It?
(2 Points)
~ Demand between the goods is perfectly price elastic.
~ No relationship between the goods.
What Is The Significance Of PED To Firms?
(2 Points)
~ When making pricing decisions to increase TR.
~ For employment, employment productivity and stock levels to match demand and increase output.
If A Business Knows That Demand For Its Product Is Price Elastic, What Should It Do With Regards To Price For TR?
Reduce the price, to increase TR.
If A Business Knows That Demand For Its Product Is Price Inelastic, What Should It Do With Regards To Price For TR?
Raise the price, to increase TR.
What Is The Significance Of XED To Firms?
(3 Points)
~ If the good is a complement, you could reduce the price of one and increase the price of the other.
~ If the good is a substitute, you could cut the price to get ahead of the rival if the goods are closely related.
~ Non-price competition, avoids price wars and reduces the substitute nature of the good which is in the firms best interest.
What Is The Significance Of YED To Firms?
(3 Points)
~ When planning for booms and recessions.
~ In booms you could then raise the price and increase demand.
~ Need to match output to demand in booms by increasing employment.
What Are The Limitations Of Using Elasticities?
(3 Points)
~ Elasticity calculations and figures are only estimated, based on how these figures are collected.
~ All figures assumes ceteris paribus.
~ PED varies along the demand curve.
What Is The Formula For Total Revenue?
Price x Quantity
If A Business Knows What Their PED Is, What Should They Do With Price To Increase Their TR?
(3 Points)
~ Elastic Only Irritates Skin.
~ EOIS.
~ Elastic, Opposite, Inelastic, Same.
