2.5 - Elasticity Flashcards
Elasticity
The responsiveness of one variable to a change in another variable.
Elasticity of demand:
is a measure of the responsiveness of the quantity demanded of a good or service to changes in one of the factors that determine it
Price Elasticity of Demand (ped)
is a measure of how the quantity demanded of a good changes when there is a change in its own price.
(PED) =
equation
% change in quantity demanded of good X / % change in price of good X
Price Elastic Demand
A change in price leads to a proportionally greater change in quantity demanded
Consumers demand is relatively responsive to price changes
PED > 1
Price Inelastic Demand
A change in price leads to a proportionally smaller change in quantity demanded
Consumers demand is relatively unresponsive to price changes
0 < PED < 1
Unitary Elastic Demand
A change in price leads to a proportionality equal change in quantity demanded.
PED = 1
Perfectly Inelastic Demand
A change in price leads to no change the quantity demanded
PED = 0
Perfectly Elastic Demand
A change in price would lead to an infinite change in the quantity demanded
PED = ∞
Determinants of PED:
- The number and closeness of substitute goods
- The degree of necessity and how widely a product is defined
- The time period considered
- The proportion of income spent on the good
When there is a change in the price of a good or service, the impact on the firm’s total revenue will depend on the —-
price elasticity of demand of a good.
If a firm wishes to increase total revenue but has a product which demands is elastic, it should
not raise the price.
If a firm wishes to increase total revenue but has a product which demands is inelastic, it should
raise the price.
For any linear down sloping demand curve:
Demand price is elastic for high prices and low quantities
-Demand price is inelastic for low prices and high quantities
(Value of PED declines as you move downwards along the demand curve)
When demand is inelastic, the tax incidence falls more on___ than ___
consumers than producers
When demand is elastic, the tax incidence falls more on ____ than____
producers than consumers
Total revenue =
price x quantity
What is a commodity
is a primary good, and is an important input to production. They come from the land, are extracted from the land, or extracted from the sea.
What is the demand for most primary commodities
The demand for most primary commodities is inelastic, with a low PED
- They generally have no substitutes
- Take up a small proportion of income and are used immediately.
Manufactured goods:
Human made goods that have been produced from raw materials transformed through a production process
- Tend to have lower PEDs than commodities
- Have substitutes
- Generally one time purchases that take up a large percentage of income
Income elasticity of demand (YED) explains
the direction and the extent to which the demand curve is shifted.
YED is a measure of
how much the quantity demanded of a good will change in response to a change in consumers income.
(equation) YED =
% change in quantity demanded of good X / % change in income (Y) of consumer
Positive YED
as income increases, quantity demanded increases
- Normal good
Negative YED
as income increases, quantity demanded decreased
- Inferior good
Income Elastic Demand
A change in income leads to a proportionally greater change in the quantity demanded.
1 < YED < -1
Income Inelastic Demand
A change in income leads to a proportionally smaller change in the quantity demanded
-1 < YED < 1
Perfectly Income Inelastic Demand
A change in income leads to no change in quantity demanded
YED = 0
when YED = 1
A change in income leads to a proportionately equal change in quantity demanded
Industries in an economy are divided into 3 sectors:
1) Primary sector - includes all primary commodities
2) Secondary sector - includes industries goods manufactured from primary commodities or intermediate goods
3) Tertiary sector - all economic goods that are not tangible but improve quality of life
Sectoral change:
The change in the structure of the economy to increase or decrease production in one sector or another
Low income countries typically focus on output of
primary products
