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economics sl > 1.6 Elasticity > Flashcards

1.6 Elasticity Flashcards

1
Q

price elasticity of demand definition

A

the responsiveness of demand to a change in price

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2
Q

PED calculation

A

percentage change in Qd/ percentage change in price

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3
Q

PED is always…

A

negative

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4
Q

why is PED always negative?

A

it reflect the law of demand (the inverse relationship between price and quantity demanded)

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5
Q

price elastic demand

A

︱PED︱> 1
PED = big/small
relatively responsive demand

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6
Q

price inelastic demand

A

︱PED︱< 1
PED = small/big
relatively unresponsive demand

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7
Q

perfectly elastic demand

A

︱PED︱= infinity
unlimited demand at a fixed price

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8
Q

perfectly inelastic demand

A

︱PED︱ = 0
PED = 0/x

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9
Q

unit elastic demand

A

︱PED︱=1
PED = x/x
mathematical hypothetical

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10
Q

the steeper the demand curve

A

the more inelastic the demand

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11
Q

you can only visually compare PED if…

A
  1. the scales are the same
  2. the comparison is within the same two prices
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12
Q

why isn’t unit elasticity of demand a straight line?

A

even though the gradient is constant, the PED at different points is actually different

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13
Q

factors determining the price elasticity of demand

A
  • necessities vs luxuries
  • the proportion of income spent on good
  • length of time
  • number & closeness of substitutes
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14
Q

why does increasing the length of time make demand more elastic

A

as time goes on consumers have the opportunity to…
1. consider their decision
2. get information on the availability and alternatives of the good

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15
Q

what affects the number of substitutes for a good

A

how narrowly/broadly the good is defined - the narrower the definition, the greater the number of substitutes, the more elastic

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16
Q

total revenue calculation

A

price x quantity sold

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17
Q

relationship between total revenue and PED

A

elastic demand: increasing the price, TR falls
inelastic demand: increasing the price, TR increases

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18
Q

price elasticity of supply definition

A

the responsiveness of supply to a change in the price

19
Q

PES calculation

A

percentage change in Qs / percentage change in price

20
Q

price elastic supply

A

PES > 1
PES = big/small

21
Q

price inelastic supply

A

PES < 1
PES = small/big

22
Q

perfectly elastic supply

A

PES = infinity
PES = unlimited change/ no change

23
Q

perfectly inelastic supply

A

PES = 0
PES = no change/unlimited change

24
Q

factor determining PES

A
  • mobility of factors of production
  • length of time
  • spare (unused) capacity of firms
  • the ability to store stocks (i.e. ability to stockpile)
25
Q

why can the ability to store stocks only affect PES over short periods of time?

A

because once stocks are released into the market, they play no role in PES

26
Q

income elasticity of demand definition

A

the responsiveness of demand for a good to a change in income

27
Q

YED calculation

A

percentage change in Qd / percentage change in income

28
Q

YED for normal goods

A

YED is positive
YED = +/+ OR -/-

29
Q

YED for normal goods that are necessities

A

0 < YED < 1

30
Q

YED for normal goods that are luxuries

A

YED = big/small
YED > 1

31
Q

YED for inferior goods

A

YED is negative
YED = -/+ OR +/-

32
Q

in what aspects can PED help understand the impact of indirect taxes

A
  1. determining the effectiveness of preventing consumption
  2. the amount of per unit tax required to be effective
  3. determining the effectiveness of raiding tax revenue
  4. tax incidence
33
Q

what is tax incidence?

A

how much of the tax burden gets passed on to consumers and how much is absorbed by producers

34
Q

tax incidence when demand is inelastic

A

more of the tax burden is paid by consumers

35
Q

tax incidence when demand is elastic

A

more of the tax burden is paid by the producers

36
Q

in what aspects can PED help understand the impact of subsidies

A
  1. determining the effectiveness of promoting consumption
  2. the per unit subsidy needed to incentivize consumption
  3. determining the burden on government expensive
  4. subsidy incidence
37
Q

how do subsidies work?

A

lower producers cost of production to effectively shift the supply curve to the right

38
Q

subsidy definition

A

a cash payment to producers for each unit fo production

39
Q

what is subsidy incidence

A

how much of the subsidy gets passed on to consumers and how much is kept by producers

40
Q

inelastic demand on the impact of a subsidy

A

the subsidy will have a limited impact on the quantity sold
-> ineffective @ promoting consumption
–> larger subsidy needed to incentivise consumption
—> expensive government spending

41
Q

limitations of using PED to help firms make pricing decisions

A
  • most firms are profit maximizers, not total revenue maximizers
  • it is hard to estimate the PED of a product for firms
42
Q

subsidy incidence when demand is inelastic

A

more of the benefit goes to consumers

43
Q

subsidy incidence when demand is elastic

A

more of the benefit goes to producers

economics sl (10 decks)

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