4. Elasticities Flashcards
Define elasticity
ELASTICITY: a measure of responsiveness
Define elasticity of demand
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
Elasticities of demand
- PED - price
- XED - price of another good
- YED - income
Define PED
PED: a measure which shows how much the quantity demanded changes when there is a change in the price of the product
PED formula

Range of PED (perfectly elastic/inelastic)
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

Inelastic demand
INELASTIC DEMAND: 0
CHnage in price - proportionally smaller change in quantity demanded - total revenue for firm will increase
Revenue boxes: a+b > b+c

Elastic demand
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

Unit elastic demand
UNIT ELASTIC DEMAND: PED=1
Change in price - proportionate change in quantity demanded - revenue will not change

Change in PED
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)

Determinants of PED
- Number, closeness of substitutes: the more substitutes - the more elastic (butter)
- Necessity of the product and how widely it is used: food less elastic than luxury holidays (habit-forming - low elasticity - cigarettes, alcohol)
- Time period considered: times change - consumer habits change - less elastic in short term - more leastic in long term
PED and taxation
Consider elasticity when placing taxes - harm market + create unemployment
Define XED
XED: a measure how much the demand for a product changes when there is a change in price of another product
XED formula

Range of XED
XED ranges from positive to negative
XED > 0 goods are substitutes
XED < 0 goods are complements

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

Range of YED
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)

Define price elasticity of supply
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
PES formula

Range of PES
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

Inelastic supply
0< PES <1 - change in price very little change in quantity supplied
Unit elastic supply
PES = 1 - change in price proportionate change in quantity supplied
Elastic supply
1 < PES < infinity - change in price leads to proportionatelly higher change in quantity supplied
Determinants of PES
- 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)
- Time period considered: the longer the time period, the more elastic PES - in long term increase their supply
- Ability to store stock: able to store - can react to price changes - elastic PES
Define commodities
COMMODITIES: raw materials such as cotton or coffee
PED of commodities
Tend to have inelastic demand - necessities
Manufactured goods demand - elastic - many substitutes
PES for commodities
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