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Microeconomics > 2.6 Elasticity > Flashcards

2.6 Elasticity Flashcards

The role of markets

1
Q

What is elasticity?

A

A measure of the sensitivity of one variable to changes in another variable
A measurement of the extent to which buyers and sellers respond to particular change in market conditions

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2
Q

When would the demand curve be elastic?

A

When the proportional change in demand is greater than the proportional change in price

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3
Q

When would the demand curve be inelastic?

A

When the proportional change in demand is less than the proportional change in price

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4
Q

What is the price elasticity of demand (PED)?

A

The responsiveness of the quantity demanded to a change in the price of a good/service

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5
Q

What’s the equation for PED?

A

%Δ price

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6
Q

What will the PED always be?

A

Negative

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7
Q

When will the PED be smaller than -1?

A

If the %Δ in QD is larger than %Δ in price (therefore it’s elastic)

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8
Q

When will the PED be between 0 and -1?

A

If the %Δ in QD is smaller than the %Δ in price (therefore it’s inelastic)

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9
Q

What is total revenue?

A
  • price x quantity sold
  • The total money a firm receives from selling goods/services
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10
Q

What determines the PED for a particular group of products?

A
  1. Availability/closeness of substitutes (inelastic: no susbstitute, elastic: close substitute)
  2. If the good is a necessity or luxury (inelastic: necessity, elastic: luxury)
  3. Relative expense of a product with respect to income/overall expenditure (inelastic: low prop. of income, elastic: high prop. of income)
  4. Time period under consideration (inelastic: short time period, elastic: long time period)
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11
Q

What is income elasticity of demand (YED)?

A

How responsive quantity demanded is following a change in consumer income

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12
Q

What’s the equation for YED?

A

%Δ income

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13
Q

What happens if the YED is positive or negative?

A

If it’s positive, it’s a normal good (increase in demand when income goes up). If it’s negative, it’s an inferior good (decrease in demand when income goes up)

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14
Q

For YED, when is a good an elastic inferior good?

A

If the YED value is below -1

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15
Q

For YED, when is a good an inelastic inferior good?

A

If the YED value is between -1 and 0

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16
Q

For YED, when is a good an inelastic normal good?

A

If the YED value is between 0 and 1

17
Q

For YED, when is a good an elastic normal good?

A

If the YED value is above 1

18
Q

What factors determine the value of YED?

A
  1. Level of income
  2. Availability of substitutes
  3. Degree of necessity
19
Q

What is cross elasticity of demand (XED)?

A

The responsiveness of quantity demanded for one good/service in relation to a change in price of some other good/service

20
Q

What’s the equation for XED?

A

%Δ price of product B

21
Q

What does a positive and negative XED suggest?

A

Positive suggests as substitute relationship (increase in price of B leads to an increase in demand of A)
Negative suggests a complimentary relationship (increase in price B leads to a decrease in demand of A)

22
Q

What does it mean if the value of the XED is close to 0?

A

The products have weak complimentary

23
Q

For XED, when do the two goods have a strong compliment?

A

When the XED value is below 0

24
Q

For XED, when do the two goods have a weak compliment?

A

When the XED is between -1 and 0

25
Q

For XED, when do the two goods have a weak substitute?

A

When the XED value is between 0 and 1

26
Q

For XED, when do the two goods have a strong substitute?

A

When the XED value is above 1

27
Q

What is the price elasticity of supply (PES)?

A

The responsiveness of the quantity supplied to a change in the market price

28
Q

What’s the equation for PES?

A

%Δ price

29
Q

What will the PES always be?

A

Positive

30
Q

What are the factors determining the PES?

A
  1. Availability of stock of the product
  2. Can product be stored? (elastic: yes, inelastic: no)
  3. Does the insutry have spare capacity? (elastic: more space, inelastic: less space)
  4. Availability of factors of production (elastic: more availability, inelastic: less availability)
  5. Length of production process (elastic: short, inelastic: long)
  6. Time period (elastic: long run, inelastic: short run)
31
Q

Why is PED useful to a firm?

A
  • Can forcast the impact of a change in price on sales volume/revenue
  • Allows them to know how to price their products e.g. pricing train tickets different based on times (price discrimination)
  • Can focus on advertising rather than increasing/decreasing price (non-pricing policy)
32
Q

What problem is there to firms when using PED?

A
  • Cannot assume other firms won’t do the same
33
Q

What’s happening to people’s real disposable income over time (YED)?

A

It’s increasing so people will spend more on income elastic normal goods, therefore firms with positive YED will do well in the future

34
Q

What will happen to demand for income elastic products (YED)?

A

It will fall, therefore demand for inferior income inelastic goods will increase

35
Q

For XED, what could businesses do with complimentary goods?

A
  • Bundle them e.g. selling meal deals
  • Take over businesses selling the compliments
36
Q

How is XED useful for firms?

A

It helps anticipate changes in demand if prices of others are changing
Helps firms realise who their competition is in the market and whether their products are substitutes or complimentary.

37
Q

What’s the effect of PED on the impact of an indirect tax e.g. sugar tax?

A

If the tax is elastic, it’s more effective. If the tax is inelastic, it’s less effective

38
Q

What’s the effect of PED on the impact of a subsidy e.g. windfarm investment?

A

If the subsidy is elastic, it’s more effective. If the subsidy is inelastic, it’s less effective.

39
Q

How would the government collect the data to measure each elasticity?

A

PED + YED: consumer surveys
XED: competitor analysis
PES: past company records

Microeconomics (9 decks)

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