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Economics > 3. Elasticity of Demand: PED and YED > Flashcards

3. Elasticity of Demand: PED and YED Flashcards

1
Q

What is elasticity of demand

A

measure of how much the demand for a product changes when there is a change in price

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2
Q

price elasticity of demand

A

measure of how much the Qd of a product changes when there is a change in P

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3
Q

PED

A

%change in Qd/ %change in P

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4
Q

PED (literal calculations)

A

((new Qd - original Qd)/original Qd) x 100/ ((new P - original P)/original P)

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5
Q

when PED= 0

A

consumer demand is not responsive to a change in price- perfectly inelastic

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6
Q

when PED = ∞

A

consumers are very responsive to a change in price- demand curve goes on forever and so Qd is infinite; if P is raised a bit demand falls to 0 (perfectly elastic)

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7
Q

value of something relatively inelastic (ignoring negative)

A

0 < PED < 1

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8
Q

inelastic demand

A

change in price leads to proportionally smaller change in Qd

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9
Q

revenue

A

price of goods and services x number of units sold

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10
Q

revenue box B + C

A

original revenue

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11
Q

revenue A+B

A

new revenue

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12
Q

value of something relatively elastic

A

1

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13
Q

When price increases for an inelastic product..

A

the quantity demanded wont fall by a lot- total revenue increases

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14
Q

when price decreases for an inelastic product…

A

the quantity demanded wont increase because customers arent responsive - total revenue decreases

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15
Q

elastic demand

A

a change in price leads to a greater than proportionate change in Qd

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16
Q

when price increases for an elastic product

A

the quantity demanded will fall by more in porportion- total revenue decreases

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17
Q

when price decreases for an elastic product

A

the quantity demanded will increase - increasing total revenue

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18
Q

unit elastic demand = PED= 1

A

when a change in P leads to a proportionate opposite change in Qd- rectangular hyperbola where revenue anywhere is constant and always has the same area

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19
Q

when price deceases for a unit elastic product

A

there is no change in total revenue

20
Q

when price increases for a unit elastic product

A

there is no change in total revenue

21
Q

Determinants for PED

A 
SPiNTime
number and closeness of Substitutes (S)
Proportion of Income spent 
Necessity of product (N)
Time period considered
22
Q

substitutes as a determinant for PED

A

more substitutes - more elastic demand
closer the substitutes - more elastic demand
eg. different brands of butter
fewer and less alike substitutes - inelastic demand
eg. oil

23
Q

necessity and how widely the product is defined as a determinant for PED

A

neccesity products are relatively inelastic eg. masks, food, cigs, alcohol (addictive)

HOWEVER if you define a product more specifically - meat as food demand is less inelastic as there are other alternatives

24
Q

proportion of income spent on a good as a determinant for PED

A

if a good costs very little and constitute small part of someones budget - demand is relatively inelastic

25
Q

time period considered as a determinant for PED

A

as P changes it takes time for consumers to change spending habits
PED more inelastic in the short term and more elastic with time as they find new products or new products come into the market

26
Q

why is PED important for firms

A

so they can predict effects of pricing decisions on Qd thus their Total revenue

27
Q

why is PED important for the government

A

so they know what to put taxes on - cuz when product P rises, demand might fall –> affect tax revenue

  1. usually place higher taxes on inelastic goods so demand wont fall significantly and lead to high unemployment
28
Q

primary commodities

A

raw materials

29
Q

manufactured products

A

inputs of labor and capital to create finished products

30
Q

PED for primary commodities (PC)

A

inelastic because the “consumers” (being producers/manufacturers) have less substitutes for raw materials
if there was a decrease in P of a PC they wouldn’t want more anyways if their production targets are set already

31
Q

PED for manufactured goods (MG)

A

elastic because more substitutes available for consumers from different producers

32
Q

income elasticity of demand (YED)

A

measuer of how much the demand for a product changes when there is a change in consumer income

33
Q

YED

A

%change in Qd/ %change in income

34
Q

YED for normal goods

A

positive sign

35
Q

if %increase in Qd < %increase in income..

A

0

36
Q

if % increase in Qd> % increase in income

A

YED > 1 = income elastic

37
Q

YED for superior goods

A

YED > 1 high income elasticity - as an increase in income allows people to buy more wants in greater number

38
Q

YED for inferior goods

A

YED < 0 negative sign - as demand decreases as income increases ppl start to buy superior goods

39
Q

why is YED important for firms

A
  1. so thye know which markets to enter
    - products with high YED - large increase in demand as income rises so their markets will grow faster
    eg. income grows in a country higher demand for smartphones - oppo, huawei, iPhone
  2. so they know which products to produce more of
    - if a country is expected to go into a recession (falling gnp) producers will want to make more inferior goods
40
Q

primary sector

A

agricultural fishing forestry mining - primary products

41
Q

secondary (manufacturing) sector

A

take raw materials to manufacture into producer goods

also includes construction

42
Q

tertiary (service) sector

A

services and intangible products eg. IT, education, mass media

43
Q

sectoral change

A

as countries and incomes grow the relative share of national output and employment changes - moving away from agriculture and towards secondary and tertiary sectors

44
Q

YED in sectoral change

A
  1. demand for primary products is inelastic so when incomes grow, demand wont change that much
  2. extra income will be spent on income elastic goods like manufactured products
  3. services have high YED so output from this sector will increase as income increase
45
Q

relating to sectoral change: why might living standards of a population increase

A

demand for tertiary products grow more rapidly as income rises and a country grows

46
Q

YED for neccesities

A

0

Economics (8 decks)

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