2.6 Elasticity Flashcards
What is Elasticity?
A measure of the responsiveness of one economic variable to another.
What is Elasticity of Demand?
Measures the amount that the quantity demanded of a good changes in response to changes in price or income.
What is price elasticity of demand?
Measure’s how much a change in price will change the amount of a good a consumer will demand.
What is something called when you are unlikely to change your demand for something?
Price Inelastic.
What is something called when your demand is willing to change?
Price elastic.
What main two factors help determine price elasticity?
(1) The availability of substitutes.
(2) Whether its a Luxury/Necessity
If the demand curve is steep will it be price elastic or inelastic?
Elastic
If the demand curve is flatter will it be price elastic or inelastic?
Elastic
What is the Equation for PED?
Change in QD% / Change in P%
How do you work out % change?
New Value-Old Value/Old Value then times that by 100 to get %
If PED is greater than 1 it is…?
Elastic
If PED is Less than 1 it is…?
Inelastic.
At the top of the demand curve it is…?
Elastic
At the bottom of the demand curve it is…?
Inelastic.
What would a tax do if a product was inelastic?
The tax will end up being paid by the consumer and not the firm, e.g. Cigarettes.
What would a tax do if a product was elastic?
Producers may choose to include the tax in their own costs.
What are Subsidies?
Funds given to firms to produce certain goods, e.g. EU farmers.
What is the goal of a subsidy?
To shift supply to the right.
What would the Subsidy do if the product had a highly inelastic PED?
Shift to the right to supply means price will fall. but quantity only increases slightly.
What would the Subsidy do if the product had a highly elastic PED?
The Subsidy would lead to a large increase in quantity produced but a smaller fall in price.
What does YED actually measure?
How much you will change your spending by.
What is a Formula for YED?
Change in QD / Change in Income.
What does the demand for normal goods increase with?
With income.
If the YED is P but less than 1 it is known as what?
Necessity good.
What is the value of a luxury good?
Positive YED that is greater than one.
What is Income elasticity of Demand?
Measures how much a change in peoples income will change the amount of a good a consumer will demand.
What is Cross Elasticity of Demand?
Measures the change in demand for a good when the price of another good changes.
What does XED actually measure?
How much your spending will change, and whether the two goods are substitutes.
What is the formula for XED?
Change in QD % / Change in P for another good %
If the XED is positive, what would the two goods be?
Substitutes, e.g. Tea and coffee, as demand for tea falls, the other rises.
Do normal goods have P or N YED values?
Positive, e.g. a car.
If the is less than 0, it is negative, then what would the two good be?
They are complements, e.g. milk and coffee, demands for both rise/fall together,
What is Price Elasticity of Supply?
Measure’s the amount that quantity supplied will change as a response to a change in price.
What does PES look at?
Looks at the behaviour of the producers instead.
What does PES actually measure?
Measures how much the supply will change by.
What does it mean if something is inelastic for PES?
Businesses are unlikely to change the quantity supplied by a significant amount if the price for it changes, S will be Steep.
If something is elastic, what will that mean, PES.
Means the businesses are likely to change the quantity supplied by a amount due to the change in price, S is less steep.
What is the formula for PES?
Change in Price % / Change in Quantity Supplied
If PES is greater than 1 it is ___ Less than 1 it is _____
1) Elastic
2) Inelastic
What’s the two factors effecting PES?
1) Spare Capacity = Higher price PES, means factors of productions may be unused.
2) Price change
