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