2.6 elasticities Flashcards
what is price elasticity of demand and what is the formula?
it measures the responsiveness of a change in demand to a change in price.
PED= % change in quantity demanded/%change in price
what does price elastic mean and what does it look like on a graph?
PED>1
the change in price leads to a larger proportional change in demand.
on a graph, the demand curve will be shallow.
perfectly elastic - PED= infinity and is s straight horizontal line.
what does price inelastic mean and what does it look like on a graph?
PED<1
the change in price leads to a smaller proportional change in demand.
on a graph, the demand curve is steep.
perfectly inelastic- PED=0 and the demand curve is a vertical line
what will happen to the tax burden if demand is inelastic?
the firm is likely to put most off the tax burden onto consumers as they know a price increase will not effect demand significantly.
what will happen to the tax burden if demand is elastic?
producers will take most of the tax burden as If price increases,the demand for the good will fall.
what will happen to total revenue if demand is inelastic or elastic?
Elastic Only Irritates Skin
Elastic Opposite Inelastic Same
inelastic- as price increases total revenue increases
elastic- as price increases, total revenue decreases
what is income elasticity of demand?
the responsiveness of a change in demand to a change in income
YED= %change in quantity demanded/% change in income.
what is an inferior good?
goods which see a fall in demand as income increases.
YED is less than 0 (negative)
what is a normal good?
demand increases as income increases
YED>0 (positive)
what is a luxury good?
an increase in income leads to an even large proportional change in demand for a good.
YED>1
what is cross elasticity of demand?
the responsiveness of a change in demand of one good to a change in price of another.
XED= %change in quantity demanded of good x/%change in quantity demanded o good Y.
what does a negative XED indicate?
the goods are compliments- as one good becomes more expensive, the demand for both falls.
what does a positive XED indicate?
the goods are substitutes.
what is the value od XED for unrelated goods?
0
what is price elasticity of supply?
the responsiveness of a change in supply to a change in price.
PED= %change in quantity supplied/%change in price
what does PES elastic mean?
PES>1
firms can increase supply quickly at little cost.
what does PES inelastic mean?
an increase in supply will be expensive and will take a long time
PED<1
what is perfectly inelastic supply?
PES=0
supply is fixed
what is perfectly elastic supply?
PES= infinity.
any quantity demanded can be met without changing price
horizontal line.
what are the factors influencing PED?
Substitutes- more subs, more elastic
Proportion of income- larger proportion, more elastic
Luxury/necessity- luxury elastic
Addictivness- more addictive, inelastic
Time- peak/off peak
what are the factors affecting PES?
Production lag- quickly, elastic
Substitutability of FOPs - more subs, elastic
Stocks - more stocks, elastic
Spare capacity- more capacity, elastic
Time scale - in SR, more inelastic
