1.2.3 Price, Income, Cross Elasticity of Demand Flashcards
What is Price Elasticity of Demand (PED)?
A measure of the sensitivity of quantity demanded to a change in price
How do you measure PED?
%change in demand / %change in price
What is an elastic PED?
When a good has a PED of greater than 1
What is an inelastic PED?
A good that has a PED of less than 1
Why is the PED always negative?
Because the demand curve is a negative correlation
What does unitary elastic mean?
A good with a PED of exactly 1
Is an elastic PED good have a steep curve or shallow curve?
Shallow
What 4 factors affect PED?
- luxury or necessity
- availability of substitutes
- time to look for alternatives
- % of income
If a good is a luxury is it PED elastic or inelastic and why?
A luxury good is PED elastic because a consumer does not need the good so is quickly deterred by an increase in price
If a good is a necessity, is it PED elastic or inelastic and why?
It is PED inelastic because the consumer needs the good for essential reasons and is willing to pay the higher price
If a good has loads of available substitutes, is it PED elastic or inelastic and why?
It is PED elastic because consumers are able to buy cheaper, suitable alternatives if the price of the original good rises
If a good is a small percentage of your income, is it PED elastic or inelastic and why?
It is PED inelastic because a rise in price for a good that is priced low will often go unnoticed by the consumer
If you don’t have a lot of time to consider your purchase, the three good going to be PED elastic or inelastic and why?
PED inelastic because you don’t have time to search for alternatives to buy instead
What do PEDs estimate?
The likely impact on total revenue following a change to price
If the good is elastic, what do you have to do to your good to increase revenue?
Cut prices
Why do you have to cut prices of an elastic good to increase revenue?
Because the customers gained from slashing prices are more than those who were willing to pay through higher price
-refer to diagram in answer-
If the good is inelastic, what do you have to do to the price to increase revenue?
Increase prices
Why do you have to increase the price of an inelastic good to increase the revenue
Because you only lose a small amount of customers compared to your vast amount of more revenue you get from customers willing to pay more
What is income elasticity of demand (YED)?
A measure of the sensitivity of demand following a change in comsumer income
How to you calculate YED?
%change in demand / %change in income
What YED does a normal good have?
Positive YED
What YED does an inferior good have?
Negative YED
