3 - Price And Income Elasticity Of Demand Flashcards
What Does PED Mean?
Price elasticity of demand.
What Is PED?
Measure of how responsive demand is to a change in price.
What Type Of Relationship Is There Between Price & Demand?
Inverse relationship.
What Does The Inverse Relationship Mean?
As price goes up, demand goes down. Vice Versa.
When PED Is Elastic What Does It Mean?
A change in price will lead to a more than proportional change in demand.
When PED Is Inelastic What Does It Mean?
A change in price will lead to a less than proportional change in demand.
What Is The Formula For PED?
% ∆ In Qd / % ∆ In Price.
Is PED Always Negative Or Positive?
Negative.
What Does It Mean When PED Is Between 0 & -1?
Demand is price inelastic.
What Does It Mean When PED Is Less Than -1?
Demand is price elastic.
When Demand Is Price Elastic, What Happens When The Selling Price Is Raised?
Sales revenue will decrease.
When Demand Is Price Elastic, What Happens When The Selling Price Is Lowered?
Sales revenue will increase.
When Demand Is Price Inelastic, What Happens When The Selling Price Is Raised?
Sales revenue will increase.
When Demand Is Price Inelastic, What Happens When The Selling Price Is Lowered?
Sales revenue will decrease.
What Are The Factors Influencing PED?
(6 Points)
~ SPLAT.
~ S = Number of substitutes.
~ P = % of income.
~ L = Luxury / Necessity.
~ A = Addictiveness / Habit forming.
~ T = Time period.
One Factor Influencing PED Was ‘Number Of Substitutes’ What Does This Mean?
The more substitutes for a certain product the more price elastic demand will be. Vice versa.
One Factor Influencing PED Was ‘% Of Income’ What Does This Mean?
The greater the % of income that a price change takes the more price elastic demand will be. Vice Versa.
One Factor Influencing PED Was ‘Luxury / Necessity’ What Does This Mean?
(2 Points)
~ Luxury goods tend to have a more price elastic demand.
~ Necessities have more price inelastic demand.
One Factor Influencing PED Was ‘Addictiveness / Habit Forming’ What Does This Mean?
(2 Points)
~ If the good is addictive it will have a more price inelastic demand.
~ If the good is habit forming it will have a more price inelastic demand.
One Factor Influencing PED Was ‘Time Period’ What Does This Mean?
(2 Points)
~ In the short run demand is more price inelastic as there a fewer substitutes available, consumers don’t have enough time to look for an alternative.
~ In the long run demand is more price elastic as more substitutes become available.
Why Is It Difficult For Firms To Measure PED?
(5 Points)
~ Difficult in finding accurate information.
~ Price elasticity changes over different price ranges.
~ Price elasticity will change over the period of the economic cycle.
~ Tastes and fashion are constantly changing.
~ Competitors don’t stand still.
What Is YED Mean?
Income elasticity of demand.
What Is YED?
A measure of the responsiveness of demand to a change in income.
Is YED Negative Or Positive?
Both.
What Is A Normal Good?
When demand for a product increases when incomes increase.
What Type Of YED Do Normal Goods Have?
Positive YED.
What Is A Inferior Good?
When demand for a product decreases when incomes increase.
What Type Of YED Do Inferior Goods Have?
Negative YED.
What Is The Formula For YED?
% ∆ In Qd / % ∆ In Income.
What Is YED Determined By?
~ Whether the good is a luxury or necessity.
~ The level of income for a consumer.
~ Standards of living.
When Is YED Price Inelastic?
Between the values of -1 and 1.
When Is YED Price Elastic?
When less than -1 and more than 1.
