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Economics revision > 4. Elasticities > Flashcards

4. Elasticities Flashcards

1
Q

Define elasticity

A

ELASTICITY: a measure of responsiveness

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2
Q

Define elasticity of demand

A

ELASTICITY OF DEMAND: measure how much the demand of a product changes when there is a change in one of the factors that determine demand

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3
Q

Elasticities of demand

A
  1. PED - price
  2. XED - price of another good
  3. YED - income
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4
Q

Define PED

A

PED: a measure which shows how much the quantity demanded changes when there is a change in the price of the product

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5
Q

PED formula

A
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6
Q

Range of PED (perfectly elastic/inelastic)

A

0 - infinity (theoretically, real values in between)

If PED = 0, change in price - no effect on quantity demanded -> demand perfectly inelastic

If PED = infinity, slightly change in P - significant change in quantity demanded -> demand perfectly elastic

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7
Q

Inelastic demand

A

INELASTIC DEMAND: 0

CHnage in price - proportionally smaller change in quantity demanded - total revenue for firm will increase

Revenue boxes: a+b > b+c

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8
Q

Elastic demand

A

ELASTIC DEMAND: 1

Change in price - proprotionally bigger change in quantity demanded - firm revenue will fall

(to rasie revenue should lower price)

revenue boxes: a+b < b+c

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9
Q

Unit elastic demand

A

UNIT ELASTIC DEMAND: PED=1

Change in price - proportionate change in quantity demanded - revenue will not change

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10
Q

Change in PED

A

In one diagram PED can vary at different points - the lower the price - the more inelastic PED - unlike high price (consumers there are less concerned with the price)

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11
Q

Determinants of PED

A
  1. Number, closeness of substitutes: the more substitutes - the more elastic (butter)
  2. Necessity of the product and how widely it is used: food less elastic than luxury holidays (habit-forming - low elasticity - cigarettes, alcohol)
  3. Time period considered: times change - consumer habits change - less elastic in short term - more leastic in long term
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12
Q

PED and taxation

A

Consider elasticity when placing taxes - harm market + create unemployment

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13
Q

Define XED

A

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

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14
Q

XED formula

A
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15
Q

Range of XED

A

XED ranges from positive to negative

XED > 0 goods are substitutes

XED < 0 goods are complements

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16
Q

Define YED

A

YED: a measure of how much demand for a product changes when there is a change in consumers’ income

17
Q

YED formula

18
Q

Range of YED

A

YED ranges from positive to negative

YED > 0 good is normal

YED < 0 good is inferior (income rises - demand falls - off to better products)

Necessary goods income inelastic demand - income does not greatly affect demand (food)

Superior goods income elastic demand - income greatly affects demand (luxury holidays - good is want not need)

19
Q

Define price elasticity of supply

A

PRICE ELASTICITY OF SUPPLY (PES): measure how much the supply of a product changes when there is a change in the price of the product

20
Q

PES formula

21
Q

Range of PES

A

Range of PES from 0 to infinity (theoretically)

PES = 0 - supply perfectly inelastic - change in price no effect on quantity supplied (in short time - PES=0 because cannot quickly change production)

PES = infinity - supply perfectly elastic - change in price - big change in quantity supplied

22
Q

Inelastic supply

A

0< PES <1 - change in price very little change in quantity supplied

23
Q

Unit elastic supply

A

PES = 1 - change in price proportionate change in quantity supplied

24
Q

Elastic supply

A

1 < PES < infinity - change in price leads to proportionatelly higher change in quantity supplied

25
Q

Determinants of PES

A
  1. How much costs rise as output is increased: if costs rise significantly but quantity dies not - inelastic - not worth

Prevents rise in cost: unused capacity, mobility of factors pf production (moving from making one to making another with same factors of production)

  1. Time period considered: the longer the time period, the more elastic PES - in long term increase their supply
  2. Ability to store stock: able to store - can react to price changes - elastic PES
26
Q

Define commodities

A

COMMODITIES: raw materials such as cotton or coffee

27
Q

PED of commodities

A

Tend to have inelastic demand - necessities

Manufactured goods demand - elastic - many substitutes

28
Q

PES for commodities

A

Inelastic supply of commodities - producers unable to respond to change quickly

Supply of manufactured goods - more elastic

Inealstic demand + inealstic supply = large swings in price of commodities - uncertainty for producers

Economics revision (25 decks)

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