4.1.3.2/4/6- PED, PES, XED, YED Flashcards
Define elasticity
The measure of how much one variable changes in response to the change in another variable
Define PED
Price elasticity of demand - the measure of responsiveness of a change in demand for a good or service to a change in its price
Define PES
Price elasticity of supply - the responsiveness of the quantity supplied of a good or service to a change in its price
Define XED
Cross elasticity of demand - measures the responsiveness of demand for good A to a change in price of good b
Define YED
Income elasticity of demand - measures the responsiveness of quantity demanded of a good to a change in income
Formula for PED
% change Qd / % change P
Formula PES
% change Qs / % change P
Formula XED
% change Qd (good A) / % change P (good B)
Formula YED
% change Qd / % change Y
Describe Perfectly inelastic PED
- PED value of 0
- despite the change in price, quantity will never change
- when price doubles, Total revenue will doubles
- relationship between TR and change in price is directly proportional
Describe inelastic PED
- absolute PED value of less than 1
- quantity demanded is not very responsive to price changes
- when price rises, TR will also rise
Describe a unitary elastic PED
- PED value of exactly -1
- the there is the same %change in quantity as % change in price
- a change in price doesn’t affect the TR
Describe an elastic PED
- absolute PED value of more than 1
- price is very responsive to price changes
- when price increases TR will decrease
Describe a perfectly elastic PED
- PED value of infinity
- demand is extremely responsive to changes in price
- if price increases, demand will fall to 0
- TR and change in quantity are directly proportional
What are the factors affecting PED
PLANTS
- proportion of income
- luxury or necessity good
- addictive
- number of uses
- time
- substitutes
How does proportion of income affect PED
the more expensive or higher percentage of total budget that a good takes up, the more elastic demand
How does luxury or necessity affect PED
- luxuries have a more elastic PED, whilst necessities have an in elastic PED
How does addiction affect PED
Is a good is addictive, people need it to feel happy or stable therefore goods have an in elastic PED
How does no of uses affect PED
Is an item has multiple uses, it is more helpful so will have a more inelastic PED
How does time affect PED
Overtime, consumers are more likely to respond to price changes as they will find adequate substitutes meaning PED will become more elastic overtime
How does substitutes affect PED
If a good has many substitutes it will have an elastic PED as there are alternatives that can be used
What is the gradient of a demand cure with an elastic PED
Smaller gradient, shallower line
What is the gradient of a demand cure with an inelastic PED
Larger gradient and steep slope
Why is PES positive
An increase in price will incentivise firms to supply more and a decrease in price will incentivise firms to supply less
Describe a perfectly inelastic PES
- PES value of 0
- supply is not responsive to any changes of price that may occur
Describe an inelastic PES
- PES value of less than 1
- supply is less responsive to price changes
Describe a unitary elastic PES
- PES value of 1
- there is an exactly equal % change of price to quantity supplied
Describe an elastic PES
- PES value of more than 1
- supply is more responsive to price
Describe a perfectly elastic PES
- PES value of infinity
- supply only occurs at one price, so at this price the quantity supplies is unlimited. There is no supply at any other price
List the factors affective PES
SIFT
- spare production capacity
- inventory available
- factor substitution
- time
How does spare production capacity affect PES
More spare production capacity enables firms to quickly increase their production, leading to a more elastic PES
How does inventory available affect PES
If there is a larger inventory, firms will be able to produce more goods quickly, increasing the elasticity of PES
How does factor substitution affect PES
If you can switch factors pf production quickly, a change in production can occur more quickly, meaning that PES is more elastic
How does time affect PES
The more time there is, the more elastic PES a good will develop
How are substitutes demonstrated by XED
A positive XED
- the relationship between the demand of good A and good B is inversely proportional
How are compliment goods demonstrated by XED
Negative XED
- there is a directly proportional relationship between the demand for good A and the demand for god B
How are unrelated goods demonstrated by XED
- close to 0
There is no relationship between the goods
How does income elasticity of demand show a normal good
- a positive YED
As income increases, the demand for the good also increases
How does YED demonstrate an inferior good
- Negative YED
As income increases, the demand for inferior goods deceases
