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Microconomics > 3.1 Price elasticity of demand (PED) > Flashcards

3.1 Price elasticity of demand (PED) Flashcards

1
Q

What is the law of demand

A
  • as price increases, quantity demanded decreases
  • as price decreases, quantity demanded increases
    *ceteris paribus
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2
Q

What does PED stand for

A

price elasticity of demand

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3
Q

What does PED measure

A

a measure of the responsiveness of the quantity demanded of a good to a change in price

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4
Q

What is the formula for PED

A

PED = % change in QD/% change in price

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5
Q

Is PED always positive or negative

A

positive

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6
Q

why is elasticity measured in percentage changes

A
  1. we need a measure of responsiveness that is independent of units
    e.g. currencies around the world
  2. percentages allow us to put responsiveness into perspective
    e.g. 2% increase of $100 and $5000
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7
Q

What does price inelastic mean

A

PED < 1

  • quantity demanded is relatively unresponsive to changes in price
  • the percentage change in quantity demanded is smaller than the percentage change in price
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8
Q

what does price elastic mean

A

PED > 1

  • quantity demanded is highly responsive to changes in prices
  • the percentage change in quantity demanded is greater than the change in price
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9
Q

what does unit elastic mean

A

PED = 1

  • the percentage change in quantity demanded is equal to the percentage change in price
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10
Q

what does perfectly inelastic mean

A

PED = 0

  • quantity demanded is unresponsive to changes in price
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11
Q

what does perfectly elastic mean

A

PED = infinity

  • change in price results in an infinitely large response in quantity demanded
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12
Q

what does the steepness of a curve that intersects tell us

A

steeper = inelastic
flatter = elastic

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13
Q

PED for goods with substitutes

A

elastic = PED > 1

  • quantity demanded is highly responsive to an increase in price if the good has substitutes as they can easily switch to another product
    *greater responsiveness to close substitutes with greater substitutability, able to easily switch
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14
Q

PED for goods with no substitutes

A

inelastic = PED < 1

  • quantity demanded remains relatively unresponsive to an increase in price because there are no alternatives/substitutes
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15
Q

PED of a good that is narrowly defined

A

elastic = PED > 1

  • the more narrowly defined, the more substitutes are available
    e.g. apples, pears
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16
Q

PED of a good that is broadly defined

A

inelastic = PED < 1

  • if something is broadly defined there are no substitutes
    e.g. fruit
17
Q

PED of necessities

A

inelastic = PED < 1

  • necessities are considered to be essential in our lives, something we cannot live without. Therefore, the quantity demanded is highly unresponsive to price changes
    e.g. food
18
Q

PED of luxuries

A

elastic = PED > 1

  • luxuries are not necessary and therefore quantity demanded is highly responsive to price changes
    e.g. jewellery
19
Q

what are some highly inelastic goods

A

goods that are addictive e.g. cigarettes, alcohol

  • increase in price will lead to only a small decrease in the quantity demanded
20
Q

what is a perfectly inelastic good

A

life-changing medicine with no substitutes as quantity demanded will remain unresponsive to price changes

21
Q

what does a longer time period mean for PED

A

becomes more elastic as consumers have the chance to adjust their behaviour by finding substitutes and changing consumption patterns
e.g. adjusting behaviour by driving electric cars, catching public transport

22
Q

what does a shorter time period mean for PED

A

immediately following a price increase, consumers are not able to alter their consumption patterns, therefore the good is inelastic

23
Q

PED if the good takes up a large portion of income

A

elastic:
consumers will notice that there are price changes and quantity demanded will respond by a greater amount
e.g. car

24
Q

PED if the good takes up a small portion of income

A

inelastic:
consumers are less concerned about the price changes and quantity demanded stays the same
e.g. toothpicks

25
Q

Define “total revenue”

A

total amount received by firms when selling a good or service = price x quantity

26
Q

What will happen to total revenue when demand is elastic (PED > 1)

A

when demand is elastic, an increase in price causes a fall in total revenue, while a decrease in price causes a rise in total revenue

27
Q

What will happen to total revenue when demand is inelastic (PED < 1)

A

when demand is inelastic, an increase in price causes a rise in total revenue, while a decrease in price causes a fall in total revenue

28
Q

What will happen to revenue when demand is unit elastic (PED=1)

A

a change in price does not cause any change in total revenue

29
Q

What are primary commodities

A

goods arising directly from the use of natural resources (land), therefore agricultural products

30
Q

What are manufactured products

A

goods produced by factors of production such as labour and capital

31
Q

Why do most primary commodities have a price inelastic demand

A
  1. they are necessities
    - consumers need them regardless of changes in price
    - quantity demanded is highly unresponsive to price changes
  2. fewer/to no substitutes
32
Q

Why do most manufactured products have a high price elastic demand

A

usually have substitutes

33
Q

Why do government need to intervene in agricultural sectors

A

frequent supply changes and large fluctuations in price due to factors out of their control can lead to unstable farmer revenues

34
Q

consequences of a low PED for primary commodities

A
  • agricultural products experience fluctuations in supply over short periods of time
  • these price fluctuations are much greater when demand is inelastic
  • primary commodities can be highly volatile
35
Q

what is price volatility

A

large price fluctuations over short periods of time

36
Q

how to farmers earn revenue

A

poor crop = less supply = higher prices
- therefore there will be an increase in revenue as the quantity demanded doesn’t decrease as much due to an increase in price

good crop = more supply = lower prices
- therefore there sill be a decrease in revenue as quantity demanded doesn’t increase much due to a decrease in price

therefore, ironic conclusion that poor crop may be beneficial for farmers.

37
Q

Is supply of agricultural products stable

A

no, because production relies on many factors beyond a farmer’s control such as natural disasters and weather conditions, which occur over short periods of time

  • therefore this causes frequent supply changes (supply shifts) and large fluctuations in price for inelastic goods

Microconomics (17 decks)

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