Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

MICRO ECONOMICS > 4.1.3.2 price, income and cross elasticities of demand > Flashcards

4.1.3.2 price, income and cross elasticities of demand Flashcards

1
Q

what is PED?

A

the price elasticity of demand is the responsiveness of a change in demand to a change in price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

what is the formula for PED?

A

% change in quantity demanded / % change in price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

is the value of price elasticity of demand positive or negative and why?

A

is negative due to the assumed inverse relationship between price and quantity demanded

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

what does it mean if a good is price elastic?

what is the numerical value?

A

a price elastic good is very responsive to change in price

the change in price leads to an even bigger change in demand

numerical value for PED is more than 1
the change in price has led to a larger % change in Q demanded

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

what does it mean if a good is price inelastic?
what’s the numerical value?

A

a price inelastic good has a demand that is relatively unresponsive to a change in a price

PED = less than 1
the change in price has led to a smaller % change in quantity demanded

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

what is the diagram for a relatively elastic good?

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

what is the diagram of the inelastic segment of a demand curve?

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

what is a unitary elastic good?
what’s the numerical value?

A

a unitary elastic good has a change in demand which is equal to the change in price

PED = 1
the change in price has led to the same % change in Q demanded

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

how do you show unitary elastic demand on a diagram?

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

what is a perfectly inelastic good?
what’s the numerical value?

A

has a demand which doesn’t change when price changes
PED = 0
the change in price has lead to no change in Q demanded

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

what is perfectly elastic good?
what’s the numerical value?

A

has a demand which falls to zero when price changes

PED = infinity
the change in price has led to an infinitely large change in Q demanded

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

how do you show a perfectly inelastic good on a diagram?

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

how do you show a perfectly elastic good on a diagram

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

how does necessity affect PED?

A

a necessary good has a relatively inelastic demand
ie) bread/electricity

  • even if the prices increase significantly, consumers will still demand necessary goods because they need it
  • luxury goods have a more elastic demand
  • if the price of flights increases, demand is likely to fall significantly
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

how does substitues affect PED?

A
  • if a good has several substitutes then demand is more price inelastic
    ie) android phones rather than iphones
  • elasticity can change within markets
  • market for bread is less elastic than market for white bread
    -> because there’s less subs for bread in general but are serval subs for white bread
    -> so white bread is more price elastic
  • the more available the substitutes, the more price elastic the demand
  • in the LONG RUN, consumers have time to respond and finds subs
    -> so D becomes more price elastic
  • in the SHORT RUN, consumers don’t have time
    -> therefore D is more inelastic
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

how does addictiveness/habitual consumption affect PED?

A
  • D for goods like cigarettes isn’t sensitive to price changes

-> because consumers become addicted
-> so D doesn’t stop even if price increases

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

how does proportion of income spent on the good affect PED?

A
  • if a good only takes up a small proportion
    ie) a magazine which rose from £1.50 to £2
  • demand is likely to be relatively price inelastic
  • if good takes up significant proportion
    ie) cars which rise from £15,000 to £20,000
  • demand is likely to be more price elastic
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

how does durability of the good affect PED?

A
  • good which lasts a long time like a washing machine has more elastic demand because consumers wait to buy another one
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

how does peak and off-peak demand affect PED?

A
  • during peak times the demand is more price in elastic

eg) train tickets from 9am to 5pm

20
Q

elasticity of demand and tax revenue

A
  • indirect tax will fall differently on consumers and firms, depending on if the good has an elastic/in elastic demand
  • taxes however shift the supply curve, not demand
  • if a firm sells a good with an inelastic demand, they’re likely to put most of the tax burden on the consumer, because they know a price increase won’t cause D to fall significantly
  • if a firm sells a good with an elastic demand, they’re likely to take most of the tax burden upon themselves, because they know a price increase means D is likely to fall, which will lower their overall revenue
21
Q

how do you show the effect of indirect tax on an inelastic demand good on a diagram?

and explain it?

A

an increase in tax will decrease supply from S1 to S2 which increases price from P1 to P2 and therefore demand contracts from Q1 to Q2

22
Q

how do you show the effect of indirect tax on an elastic demand good on a diagram?

and explain it?

A

demand will fall significantly from Q1 to Q2

23
Q

an elastic demand good or inelastic demand good and their indirect tax approach

which is better for raising government revenue

A

inelastic demand = most effective for raising gov revenue

elastic demand = not as effective, but if a gov wants to reduce the demand of a particular good, it’s effective

24
Q

what is a subsidy?

A

is a payment from the gov to firms to encourage the production of a good and to lower their average costs
has the opposite effect of a tax because it increases upply

25
Q

where does the benefit of a subsidy go?

A

can go to both the producer or the consumer

producer
- in the form of increase revenue

consumer
- in the form of lower prices

26
Q

how do you show the effect of a subsidy on elasticity of demand on a diagram?

A
27
Q

PED and total revenue?

A

total revenue is equal to average price times quantity sold
TR=PxQ

  • if a good has an in elastic demand, the firm can raise its price and quantity sold will not fall significantly
  • this will increase total revenue
  • if a good has an elastic demand and the firm raises its price, quantity sold will fall
  • this will reduce total revenue
28
Q

what is YED?

A

income elasticity of demand is the responsiveness of a change in demand to a change in income

29
Q

what’s the formula for YED?

A

YED = % change in Q demanded / % change in real income

30
Q

what is an inferior good?

what’s the numerical value?

A

those which see a fall in demand as income increases

eg) the value options at supermarkets could be seen as inferior
-> as income increases, consumers switch to branded goods

YED = less than 0

31
Q

what is a normal good?

what’s the numerical value?

A

with normal goods, demand increases as income increases

YED = more than 0

32
Q

what’s a luxury good?

what’s the numerical value?

A

with luxury goods an increase in income causes an even bigger increase in demand

YED = more than 1

eg) a holiday is a luxury good

  • luxury goods are also normal goods, and they have an elastic income
  • during periods of prosperity, like economic growth when real incomes are rising. firms might switch to producing more luxury goods and fewer inferior goods because demand for luxury goods will be increasing
33
Q

what is negative income elasticity?

what’s the numerical value?

A

when demand for a product is negative income elastic

YED = less than 0

the increase in income has led to a fall in demand
negative income elastic goods are referred to as inferior goods

34
Q

what does income elastic demand mean?

what’s the numerical value?

A

demand for a product is income elastic

YED = greater than 1

increase in real income leads to greater % in demand
income elastic goods are often referred to as luxury goods

35
Q

what does income inelastic demand mean?

what’s the numerical value?

A
  • demand for a product is income in elastic

YED = between 0 and 1

increase in real income leads to smaller % increase in demand
income elastic goods are often referred to as basic goods

36
Q

what is XED?

A

cross elasticity of demand is the responsiveness of a change in demand of one good, X, to a change in price of another good, Y

37
Q

what’s the formula for XED?

A

XED = % change in Q demanded of product A / % change in price of product B

38
Q

what value of XED do complementary goods have?
what happens with complementary goods?

A

a negative XED
- if one good becomes more expensive the Q demanded for both goods will fall

39
Q

what’s the difference between close and weak complements?

A

close complements
- a small fall in price of good X leads to a large increase in quantity demanded of Y

weak complements
- a large fall in price of good X leads to only a small increase in Q demanded of Y

40
Q

how do you show close complements on a diagram?

A
41
Q

how do you show weak complements on a diagram?

A
42
Q

what value of XED do substitute goods have?
what happens with them?

A

subs can replace another good so the XED is positive

  • the demand curve is upward sloping
  • if the price of one brand of TV increases, consumers might switch to another brand
43
Q

what’s the difference between close subs and weak subs?

A

close subs
- a small increase in the price of good X leads to a large increase in QD of Y

weak subs
- a large increase in the price of good X leads to a smaller increase in QD of Y

44
Q

how do you show close subs on a diagram?

A
45
Q

how do you show weak subs on a diagram?

A
46
Q

what value of XED do unrelated goods have?

A

have an XED equal to 0

47
Q

why are firms interested in XED?

A
  • firms are interested in XED because it allows them to see how many competitors they have
  • therefore they’re less likely to be affected by price changed by other firms, if they’re selling complementary goods or subs

MICRO ECONOMICS (25 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions