2.5 elasticities of demand Flashcards
elasticity
the responsiveness of one variable to the change in another variable
PED (def+calculation)
price elasticity of demand
the measure of the responsiveness of the quantity demanded of a good or service to a change in its price.
%∆in qty demanded/%∆in price
PED>1
price elastic demand
change in price leads to a greater than proportionate change in qty demanded
0<PED<1
price inelastic demand
change in price results in a proportionately smaller change in demand
PED=1
unitary elastic demand
change in price leads to a proportionately equal change in demand
(graph is a curve)
PED=0
perfectly inelastic demand
change in price results in no change in qty demanded
PED=∞
perfectly elastic demand
a change in price results in infinite change in qty demanded
determinants of PED
number and closeness of substitutes
degree of necessity and how widely its defined
time period considered
proportion of income spent on the good
how does no. & closeness of substitute goods affect PED?
substitution effect
price rise, relatively more expensive than than other goods, consumers switch to substitutes
closeness of substitutes - close substitutes - switch easily, remote - switch less easily
how does degree of necessity & how widely a good or service is defined affct PED?
necessity = less responsive as have to consume regardless
necessity = a good or service tat qty demanded does not change much in response to a price change bc consumers consider it essential
e.g. drugs
widely defined = incl every product in category e.g. food = will not have many substitutes
how does time period considered affect PED?
immediate term, consumer no time to react and look for alternatives, demand = inelastic
long term= got time to find substitutes = demand more elastic
how does proportion of income spent on the good affect PED
disposable income= The income remaining after deduction of taxes and social security charges, available to be spent or saved as one wishes.
if low price=spend small proportion of income on good/service = small on qty demanded = inelastic
if high price = spend large proportion of income on good/service = larger impact on qty demanded = elastic
total revenue
money earned by a firm from selling a good or service, the selling price multiplied by the total qty sold
pricexqty
commodity
a primary good, and is an important input to production
e.g . oil, ore, timbre
profits
money remaining from sales revenue after costs or production have been subtracted
Tprofit - T cost of production
ped changes along linear demand curve
its hard to explain this w/o the diagram man idk
tax incidence
percentage of an indirect tax paid for by consumers and producers respectively (burden on P or C)
indirect tax
a tax imposed on a good or service, it typically paid to the govt. by the producers or supplied and is considered a cost of production
implication of PED on indirect tax
if PED inelastic, consumers pay more as producers confident that they can raise price w/o losing too may sales
if elastic, consumers pay less tax as sales drop more when price increases
increase in price leads to large impact on demand thus producers more willing to absorb tax payment
tax revenue calculation
Qt x (Pt-P1)
subsidy
an amount of money granted by the govt to a firm or industry, reducing the firm’s COP, increasing the supply of the good or service. usually a per-unit payment by govt, t firms in order to lower production costs and increase production
subsidy effect on demand when diff PED
inelastic = consumption increase little
elastic = great increase in consumption
PED of commodities
inelastic
manufactured goods
human-made goods that have been produced from raw materials transferred through a production process
YED
income elasticity of demand
a measure of how much qty demanded of a good or service changes in response to an income change
%∆qty demanded/%∆income
normal goods (def +YED)
goods whose demand increases as people’s incomes increase
YED>0
inferior goods (def+ YED)
goods whose demand decrease as people’s income increases
YED<0
-1<YED<1
YED close to 0
income inelastic demand
a change in income results in a less than proportionate change in demand
not responsive to income change
necessity goods
necessity goods
good or service whose qty demanded does not change much in response to a price change bc consumers consider it essential
YED>1
YED<-1
income elastic demand
a change in income leads to a greater than proportionate change in qty demanded
YED=0
perfectly income inelastic demand
a change in income leads to no change in qty demanded
YED>0
normal good
qty demanded of a good increases as consumer income increases
YED<0
inferior good
qty demanded of a good decreases as consider income increases
(inverse rs)
YED=1
no classification
a change in income leads to a proportionately equal change in qty demanded
YED > 1
superior/luxury good
% change in qty demanded does not change much in response to a price change bc consumers consider it essential
importance of YED to firms (uses to firms)
1. predict action of consumers in recession and growth
recession = incomes and employment decreasing
e.g.
luxury good, income elastic, recession = demand drop, growth = up
inferior goods, income also elastic, recession = demand up
necessity = not sensitive to either
2. subsidies and taxes, how much producers and consumers absorb
inelastic = more to consumers
elastic = more to producers
economic growth
when a country produces more goods and services in one period than in the previous one. it is usually measured by changes in real GDP
economic growth
when a country produces more goods and services in one period than the previous one. it is usually measured by changes in real GDP
economic recession
negative economic growth occurring over two or more quarters
3 sectors of economy and def
primary sector: sector of economy that involves the extraction of natural resources
secondary: ‘’ where raw materials are combined or changes through manufacturing to make physical changes
tertiary: ‘’ where services are provided to consumers
sectoral change
(low income -> middle -> high)
the change in structur of economy to increase or decrease production in one sector or another
low income: demand for necessity income inelastic -> spend large share of their income on basic goods -> prod focus on primary 75-15-10 (percentage of pri-sec-ter)
middle income: demnd for manufactured goods increases more rapidly as econ grow and achieve higher levels of national income -> up spending. disproportionately larger than income increase in sec(YED>1)40-30-30
high nat.income: consumers send disproportionately more on tertiary sec. (YED even higher) = tertiary largest sectr5-30-65
engel curve
a function that describes how household expenditure on a particular good or service changes w household income
y-$/%
x-income
