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A-Level Economics > 1.2.3 - Price, Income & Cross Elasticities Of Demand > Flashcards

1.2.3 - Price, Income & Cross Elasticities Of Demand Flashcards

1
Q

What Is The Law Of Demand?

A

States that when there is an increase in price, there will be a fall in QD.

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2
Q

What Is PED?

A

Measures the responsiveness of QD given a change in price.

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3
Q

How Do You Calculate PED?

A

%∆QD / %∆P

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4
Q

How Do You Calculate %∆?

A

Difference / Original x 100

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5
Q

What Will The Outcome Be Once You Have Calculated PED?

A

Always negative.

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6
Q

If The PED Value Is Greater Than 1, What Is It?

A

Demand is price elastic.

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7
Q

What Is Meant When Demand Is Price Elastic?

A

For any given price change, there is a greater proportionate change in QD.

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8
Q

If The PED Value Is Less Than 1, What Is It?

A

Demand is price inelastic.

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9
Q

What Is Meant When Demand Is Price Inelastic?

A

When the price changes, QD will change proportionally less than the change in price.

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10
Q

If The PED Value Is 0, What Is It?

A

Demand is perfectly price inelastic.

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11
Q

What Is Meant When Demand Is Perfectly Price Inelastic?

A

Regardless of the price change, QD won’t change at all.

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12
Q

If The PED Value Is ∞, What Is It?

A

Demand is perfectly price elastic.

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13
Q

What Is Meant When Demand Is Perfectly Price Elastic?

A

A change in price means that quantity falls to 0.

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14
Q

If The PED Value Is 1, What Is It?

A

Demand is unit price elastic.

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15
Q

What Is Meant When Demand Is Unit Price Elastic?

A

QD changes by a smaller % than price.

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16
Q

What Is The Mnemonic Used For Factors That Influence PED?

A

SPLAT.

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17
Q

What Does SPLAT Stand For?

A

Substitutes (No).
Percentage of income.
Luxury / Necessity.
Addictive / Habit forming.
Time period.

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18
Q

If There Are More Substitutes Available, What Will The PED Be?
(2 Points)

A

~ More = Elastic.

~ Less = Inelastic.

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19
Q

If There Is A Greater Percentage Of Income That A Price Change Takes, What Will The PED Be?
(2 Points)

A

~ Greater = Elastic.

~ Less = Inelastic.

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20
Q

If The Good Is A Luxury Or Necessity, What Will The PED Be?
(2 Points)

A

~ Luxury = Elastic.

~ Necessity = Inelastic.

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21
Q

If The Good Is Addictive Or Habit Forming, What Will The PED Be?
(2 Points)

A

~ Addictive = Inelastic.

~ Habit Forming = Inelastic.

22
Q

In The SR Or LR, What Will The PED Be?
(2 Points)

A

~ SR = Inelastic.

~ LR = Elastic.

23
Q

What Is YED?

A

Measures the responsiveness of QD given a change in income.

24
Q

How Do You Calculate YED?

A

%∆QD / %∆Y

25
Q

What Type Of Relationship Does A Normal Good Have Between Income & Demand?
(2 Positive)

A

~ Positive.

~ As income rises, demand goes up. Vice versa.

26
Q

What Type Of Relationship Does An Inferior Good Have Between Income & Demand?
(2 Positive)

A

~ Negative / Inverse.

~ As income rise, demand falls. Vice versa.

27
Q

If The YED Figure Is Positive, What Type Of Good Is It?

A

Normal good.

28
Q

If The YED Figure Is Negative, What Type Of Good Is It?

A

Inferior good.

29
Q

If The Normal Good YED Figure Is Greater Than 1, What Is It?
(2 Points)

A

~ Demand is income elastic.

~ Normal luxury.

30
Q

If The Normal Good YED Figure Is Less Than 1, What Is It?
(2 Points)

A

~ Demand is income inelastic.

~ Normal necessity.

31
Q

If The Inferior Good YED Figure Is Greater Than 1, What Is It?

A

Demand is income elastic.

32
Q

If The Inferior Good YED Figure Is Less Than 1, What Is It?

A

Demand is income inelastic.

33
Q

If The YED Figure Is 0, What Is It?

A

Perfectly income inelastic.

34
Q

What Are The Factors That Influence YED?
(3 Points)

A

~ Economic state.

~ Minimum wage legislation.

~ Taxation.

35
Q

What Is XED?

A

Measures the responsiveness of QD of a good / service given a change in price of another.

36
Q

How Do You Calculate XED?

A

%∆QDa / %∆Pb

37
Q

If The XED Figure Is Positive, What Does This Mean?

A

The 2 goods are substitute goods.

38
Q

If The XED Figure Is Negative, What Does This Mean?

A

The 2 goods are complement goods.

39
Q

What Is The Mnemonic For XED?
(3 Points)

A

~ Party Season Near Christmas.

~ Positive = Substitutes.

~ Negative = Complements.

40
Q

If The XED Value Is Greater Than 1, What Is It?
(3 Points)

A

~ 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.

41
Q

If The XED Value Is Less Than 1, What Is It?
(3 Points)

A

~ 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.

42
Q

If The XED Value Is 0, What Is It?
(2 Points)

A

~ Demand between the goods is perfectly price elastic.

~ No relationship between the goods.

43
Q

What Is The Significance Of PED To Firms?
(2 Points)

A

~ When making pricing decisions to increase TR.

~ For employment, employment productivity and stock levels to match demand and increase output.

44
Q

If A Business Knows That Demand For Its Product Is Price Elastic, What Should It Do With Regards To Price For TR?

A

Reduce the price, to increase TR.

45
Q

If A Business Knows That Demand For Its Product Is Price Inelastic, What Should It Do With Regards To Price For TR?

A

Raise the price, to increase TR.

46
Q

What Is The Significance Of XED To Firms?
(3 Points)

A

~ 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.

47
Q

What Is The Significance Of YED To Firms?
(3 Points)

A

~ 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.

48
Q

What Are The Limitations Of Using Elasticities?
(3 Points)

A

~ 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.

49
Q

What Is The Formula For Total Revenue?

A

Price x Quantity

50
Q

If A Business Knows What Their PED Is, What Should They Do With Price To Increase Their TR?
(3 Points)

A

~ Elastic Only Irritates Skin.

~ EOIS.

~ Elastic, Opposite, Inelastic, Same.

A-Level Economics (87 decks)

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