2.5-2.6 PED, YED, PES Flashcards
elasticity
responsiveness of one variable to a change in another variable
price elasticity of demand (PED)
- measure of how much the quantity demanded of a good changes when there is change in price
- (percent change in quantity demanded) / (percent change in price), always positive value
inelastic goods
insensitive to changes in price
- few close substitutes
- high degree of necessity
- small portion of income
- addictive
- required now than later (time sensitive)
- PED < 1
elastic goods
sensitive to changes in price
- many substitutes
- luxury good
- large portion of income
- non-addictive
- not urgent, plenty of time to decide
- PED > 1
SPLAT
- S: substitutes
- P: percentage of income
- L: luxury or necessity
- A: addiction
- T: time
perfectly elastic demand
- PED = inf
- horizontal straight line graph
relatively elastic demand
- PED > 1
- flatter (lower slope) straight line graph
unitary elastic demand
- PED = 1
- curvy line graph OR middle point in slope=1 straight line graph
relatively inelastic demand
- PED < 1
- higher slope straight line graph
perfectly inelastic demand
- PED = 0
- vertical straight line graph
total revenue
price x quantity
elasticity effect on total revenue [elastic]
- increase in price -> decrease in TR
- decrease in price -> increase in TR
elasticity effect on total revenue [inelastic]
- increase in price -> increase in TR
- decrease in price -> decrease in TR
elasticity effect on total revenue [unitary]
- increase/decrease in price -> no change in TR
PED change in slope=1 demand curve
- left (highest) to middle point: PED > 1, elastic
- middle point: PED=1, unitary
- middle point to right (lowest): PED < 1, inelastic
TR change in slope=1 demand curve
opening down parabola with its maximum point at point with PED=1 value
consumer surplus
- difference between highest price consumers are willing and able to pay and the actual price they pay
- left&high triangle at supply and demand graph
producer surplus
- difference between the lowest price producers are willing and able to offer the good and the actual price they received for it
- left&bottom triangle at supply and demand graph
social/community surplus
- sum of consumer & producer surplus
- total benefit gained by society when market is at equilibrium
taxes on goods with inelastic demand
- earn more revenue due to change in price changing Qd very little
income elasticity of demand (YED)
measure of how much quantity demanded of a good will change in response to change inc onsumers’s incomes
normal good
- yed > 0
- Qd increases as Y increases (shape similar to supply graph)
inferior good
- yed <0
- Qd decreases as Y increases (shape similar to demand curve)
income elastic demand (necessity good)
-1 < yed < 1
change in income -> proportionally smaller change in Qd
income elastic demand (luxury good)
yed <-1 or yed >1
change in income -> proportionally bigger change in Qd
perfectly income inelastic demand
yed=0
change in income -> no change in Qd
closer yed is to 0, greater the necessity
YED = 1
proportional change
change in income -> proportionally equal change in Qd
price elasticity of supply (PES)
a measure of how much the quantity supplied of a good changes when there is a change in its own price
