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Economics - Sept to Oct > 4) Elasticity - MMT > Flashcards

4) Elasticity - MMT Flashcards

1
Q

what is elasticity?

A

elasticity measures the responsiveness of quantity demanded for products to changes in:
- Price
- Income
- Price of other goods

as well as responsiveness of supply to changes in price

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2
Q

when is elasticity measured? (in quantity demanded and supply)

A

quantity demanded:
1) Price
2) Income
3) Price of other goods

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3
Q

when are goods described as “elastic” or “inelastic”?

A
  • Highly responsive goods are -> elastic
  • Unresponsive goods are -> inelastic
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4
Q

what 4 types of elasticity are there?

A

1) Price Elasticity of Demand (PeD)
2) Price Elasticity of Supply (PeS)
3) Cross Elasticity of Demand (XeD)
4) Income Elasticity of Demand (YeD)

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5
Q

what is the shorthand for Price Elasticity of Demand?

A

PeD

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6
Q

what is the shorthand for Price Elasticity of Supply?

A

PeS

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7
Q

what is the shorthand for Cross Elasticity of Demand?

A

XeD

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8
Q

what is the shorthand for Income Elasticity of Demand?

A

YeD

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9
Q

what variable is Elasticity?

A

“it depends variable” in a evaluate type question, it measures by how much will something change as a result of a change in a related factor

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10
Q

Elasticity = … = …

A

Elasticity = Responsiveness = Sensitivity

  • how sensitive is the demand or supply of the product to changes in circumstances
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11
Q

what does “highly responsive goods” and “unresponsive/ insensitive” mean (linking to elasticity)

A

1) if it’s quantity changes a lot after a change in circumstances

2) if it doesn’t change by much

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12
Q

what is Price Elasticity of Demand (PeD)?

A

measures the responsiveness of quantity demanded to changes in the price of the product

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13
Q

Price Elasticity of Demand - what does it mean that a product is “price elasticity” or “price inelastic”?

A

eg if the quantity demanded changes proportionately more than the change in price (eg 10% fall in quantity after a 2% change in price), the product is price elastic

if the quantity demanded changes by proportionately less than the change in price, the product is price inelastic

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14
Q

what is Price Elasticity of Supply (PeS)?

A

it measures the responsiveness of quantity supplied to changes in the price of the product

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15
Q

Price Elasticity of Supply - what does it mean “supply of the product is price elastic/ inelastic”

A
  • if the quantity supplied changes proportionately more than the change in price (e.g. 10% increase in quantity after a 2% change in price) supply of the product is price elastic
  • if the quantity supplied changes by proportionately less than the change in price, the product is price inelastic
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16
Q

what is Income Elasticity of Demand (YeD)?

A

measures the responsiveness of quantity demanded to changes in the levels of RDI in the economy

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17
Q

Income Elasticity of Demand - what does it mean “ the product is income elastic/ inelastic”

A
  • if the quantity demanded changes proportionately more than the change in RDI (e.g 10% fall in quantity after a 2% change in price) the product is income elastic
  • if the quantity demanded changes by proportionately less than the change in income, the product is income inelastic
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18
Q

what is Cross Elasticity of Demand (XeD)?

A

measures the responsiveness of quantity demanded to changes in the price of another product

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19
Q

Cross Elasticity of Demand (XeD) - what does it mean “the product is cross elastic/ inelastic”

A
  • if the quantity demanded changes proportionately more than the change in price of the other product the product is cross elastic.
  • if the quantity demanded changes by proportionately less than the change in price of the other product, the product is cross inelastic
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20
Q

what is the equation used to calculate PeD?

A

percentage change in quantity demanded/ percentage change in price

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21
Q

when using the equation to calculate PeD, what does an answer higher than 1 or lower than 1 mean?

A
  • higher than 1 its elastic
  • lower than 1 its inelastic
    !! it doesn’t matter whether its positive or negative, its the size of the number that matters!!
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22
Q

when using the equation to calculate PeD, is the answer a percentage or a number?

A

its not a percentage, if you divide a % by a % the answer is not a %

23
Q

when using the equation to calculate PeD, why is it negative?

A

because the movement in the top and bottom lines is almost always either +/- or -/+. That’s because of the law of demand (P goes up Qd goes down)

24
Q

how do you calculate YED?

A

% change in quantity demanded/ % change in RDI (Y)

25
Q

if YED = 5, demand for this product is… elastic

A

highly income

26
Q

if YED = 0.25, demand for this product is…

A

inelastic

27
Q

is expected answer for YED positive or negative?

A

positive, if incomes rise then demand for products should too

28
Q

if YED is negative, why is this significant?

A

it signifies an inferior good

29
Q

if the sign for YED is positive what sort of goods/services are they?

A

normal goods or services

30
Q

why do inferior gods produce a negative YED?

A

when RDI increases their sales might fall, when RDI decreases their sales increase, (eg Poundland does better in recessions)

31
Q

what does a high YED (eg 5) show?

A

that the product or service is highly sensitive to changes in RDI (many luxury products fall into this caategory)

32
Q

what does a low YED reveal (eg 0.2)?

A

consumers may continue to buy this product regardless of changes in income (milk is one examples of this, these goods are considered necessities)

33
Q

summary: why is YED important?

A

informs businesses how their sales are likely to react to a change in RDI, most goods will increase/decrease in line with RDI, however inferior goods move i the opposite direction to RDI

34
Q

what is the equation for Cross Elasticity of Demand? (XeD)

A

% change in the QD of good A / % change in the price of good B

35
Q

what is the equation for PeS?

A

% change in Qs / % change in P

36
Q

what sort of answer do we expect with PeS, positive or negative and why?

A
  • positive, because in normal circumstances, any change in P will move S in the same direction
  • so if P goes up Qs goes up (++)
  • if P goes down Qs goes down (- -)
37
Q

what makes elasticity more than 1?

A
  • if the top line is a higher number, then the answer is more than 1 (and is elastic)
  • (if the top line is a smaller number the answer is less than 1, inelastic)
38
Q

in the short term what is PeS like?

A

many products have very low results, supply can be highly inelastic

39
Q

in the long term what is PeS like?

A

PeS should almost always increase as businesses have time to adjust their processes to the new price

40
Q

why is it important to be elastic with PeS?

A

a higher PES means that the business can react quickly to take advantage of higher prices (more profitable) or reduce quantities of lower price products (less profitable)

41
Q

for XeD why are the signs important (+ -)?

A

it depends on the relationship on the goods, if they are substitutes or complementary

42
Q

in XeD, are substitutes positive or negative outcome?

A

positive

43
Q

why are the outcome of substitutes positive?

A
  • if the goods are substitutes, an increase in price for good A, might increase Qs for B (++)
  • a decrease in price for A might decrease Qd for B (- -)
44
Q

in XeD what sort of goods have a negative outcome?

A

indicates goods in joint demand, complementary goods

45
Q

why do complementary goods have a negative outcome?

A
  • eg as the price of milk increases we may consume less tea
  • therefore the top line and the bottom lines will have different signs (+ -)
46
Q

what does it mean if the answer for XeD is higher than 1?

A

eg +2 or -2, this shows a strong link between the goods

47
Q

what does it mean if the outcome for XED has a low score?

A

eg +0.1, or -0.2
shows that there is a weak link between the price of one good and the quantity demanded for the other

48
Q

what does PeD inform for businesses?

A

most likely outcomes from changing the prices of their products

49
Q

what does YED inform businesses?

A

the likely impact from changes in the economic cycle, eg recessions

50
Q

what does XeD inform businesses?

A

the likely impact from prices changes made by other companies

51
Q

what does PeS inform businesses?

A

informs them of the actions that are needed with production planning and schedules to ensure efficient response to changing market conditions

52
Q

do businesses prefer a low or high PeD?
do businesses prefer a low or high PeS?

A
  • low PeD
  • high PeS
53
Q

what do businesses prefer in terms of YeD and XeD?

A

they will want to have different products which will have different values, enabling them to cope in different situations

Economics - Sept to Oct (12 decks)

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