Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

OCR A-Level Economics > 2.6 - Elasticity > Flashcards

2.6 - Elasticity Flashcards

1
Q

What does elasticity measure?

A

It measures the responsiveness of one variable to the change in another variable.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is the equation for Price elasticity of demand? (PED)

A

PED= %change in Qd/

%change in price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What does PED equal for elastic demand?

A

PED > 1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What does PED equal for inelastic demand?

A

PED < 1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What does PED equal for unitary elastic demand?

A

PED = 1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Why is PED almost always negative?

A

PED is almost always negative as an increase in price would result in a decrease in demand.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is the equation for income elasticity of demand? (YED)

A

YED = %change in Qd/

%change in income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What YED do normal goods have?

A

Normal goods have a positive income elasticity, YED > 0 (income rises; demand increases).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What YED do inferior goods have?

A

Inferior goods have negative income elasticity, YED < 0 (income rises; demand decreases).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is cross-price elasticity of demand?

A

Cross-price elasticity of demand is when a change in the price of one good can change the quantity demanded of another.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is the equation for cross-price elasticity of demand? (XED)

A

XED = % change in quantity demanded of good A ÷ % change in the price of good B.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

When is XED positive?

A

XED is positive if the goods are substitutes. XED > 0

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

When is XED negative?

A

XED is negative if the goods are complements. XED < 0

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What does an XED close to 0 suggest?

A

The goods are unrelated.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is Perfectly elastic demand? What does the curve look like?

A

PED = +/- infinity.
Any price increase will cause demand to drop to zero. A horizontal line on a price (y axis) to quantity (x axis) pair of axes.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is Perfectly inelastic demand?

A

PED = zero.

Any price change won’t affect demand. A vertical line on a price (y axis) to quantity (x axis) pair of axes.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What happens if the price is increased for an inelastic good?

A

A producer can increase price without the quantity sold falling very much.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What is unitary demand?

A

If there is unitary elasticity, any percentage change in price will be offset by an equivalent percentage change in quantity demanded.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What does unitary demand mean for price changes?

A

For moderate price changes, revenue will not change.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What happens if output increases if PED > 1?

A

Revenue increases.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What happens if output increases if PED < 1

A

Revenue decreases.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What does Price elasticity of supply measure?

A

PES measures the responsiveness of quantity supplied given a change in price.

23
Q

Why do firms aim for a high PES?

A

Firms aim for high elasticity of supply so that they can react rapidly to changes in price and demand.

24
Q

How can firms increase their elasticity?

A

Improve their technology.
Introduce flexible working patterns.
Have excess production capacity.

25
Q

What is the equation for Price elasticity of supply?

A

PES = % change in quantity supplied ÷ % change in price.

26
Q

What does PES equal for elastic supply?

A

PES > 1

So a higher PES value means more elastic supply.

27
Q

What does PES equal for inelastic supply?

A

1 > PES > 0

So a smaller PES value means more inelastic supply.

28
Q

What does PES equal for unitary elasticity of supply?

A

PES = 0

Percentage change in quantity supplied = percentage change in price.

29
Q

Why would a company outsource their production?

A

It gives them access to a more flexible workforce and greater excess production capacity. This improves their price elasticity of supply.

30
Q

What is the mnemonic for the factors that affect Price elasticity of demand? (PED)

A

SPLAT

31
Q

What does the S stand for?

A

Substitutes (number of them). The greater number of substitutes, the more elastic demand the good will have.

32
Q

What does the P stand for?

A

Percentage of income. The greater the POI the price change takes, the more elastic demand will be.

33
Q

What does the L stand for?

A

Luxury/necessity.

34
Q

What does the A stand for?

A

Addictive/ Habit forming. If the good is additive then it will be more inelastic in demand.

35
Q

What does the T stand for?

A

Time period. In the short run, demand for goods may be more inelastic as there is less time to seek alternatives. In the long run, demand for goods may be more elastic as there is time to look for alternatives.

36
Q

What is the mnemonic for the factors affecting Price elasticity of supply? (PED)

A

PSSST

37
Q

What does the P stand for? (PES)

A

Production lag. The longer the production lag for a good or service the more price inelastic supply will be.

38
Q

What does the 1st S stand for? (PES)

A

Stocks. The larger the level of stocks, the more price elastic supply will be as it will be easier to respond to a price/demand increase.

39
Q

What does the 2nd S stand for? (PES)

A

Spare capacity. The more spare capacity, the more price elastic supply will be. Flexible working hours.

40
Q

What does the 3rd S stand for? (PSSST)

A

Substitute-ability. The factors of production are able to be substituted for goods. A business makes cars and vans, wants the FOP’s for cars to be easily substituted to making vans.

41
Q

What does the T stand for? (PSSST)

A

Time period. In the short run, supply is price inelastic. In the long run, supply is more price elastic. In the short run, there is at least 1 fixed factor of production (usually land and capital) which cannot be extended quickly.

42
Q

When is PED useful for businesses?

A

Pricing decisions to increase total revenue. Also useful for employment, increase their level of stocks and flexibility.

43
Q

When is PES useful for businesses?

A

Find ways to make supply price elastic. Use the PSSST mnemonic.

44
Q

When is XED useful for businesses?

A

Important for making pricing decisions. (Nespresso machines and capsules, complement goods). Important for substitutes aswell. Non-price competition (cutting prices may trigger a price war) can reduce the substitute nature of your good. Good to look at for employment and stocks and output.

45
Q

When is YED useful for businesses?

A

Pricing decisions. Able to plan for booms and recessions. Able to identify whether the good is a normal good/inferior good.

46
Q

What are the drawbacks of using elasticity?

A

1) Elasticity figures are only estimates. (Data collected through surveys, past data)
2) Assume Ceteris Paribus (Other factors apply in the real world)
3) PED varies along the demand curve.

47
Q

Is elasticity constant on a demand curve?

A

No. Despite the gradient being constant, elasticity varies along the curve. This is because elasticity is worked out using %CHANGES!

48
Q

What does the very top part of the demand curve represent?

A

Perfectly elastic demand, as it is infinity.

49
Q

What does the top half of the demand curve represent?

A

Elastic demand. For the top half of the demand curve, the %changes of Qd are always going to be greater than the %change in price.

50
Q

What does the bottom half of the demand curve represent?

A

Inelastic demand. For the bottom half of the demand curve, the %changes of Qd are always going to be less than the %change in price.

51
Q

When is total revenue maximised?

A

The midpoint of the demand curve, then there is unitary elasticity.

52
Q

What is the relationship between price and total revenue? (mnemonic)

A 
Elastic
Opposite
Inelastic
Same
(EOIS)
53
Q

What happens to total revenue if the firm knows their product is elastic and they change their price?

A

If they increase price, total revenue falls. If they decrease the price, total revenue rises. EO - elastic, the opposite happens.

54
Q

What happens to total revenue if the firm knows their product is inelastic and they change their price?

A

If they increase the price, total revenue rises. If they decrease the price, total revenue falls.
IS - Inelastic, the same happens.

OCR A-Level Economics (14 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions