book 3 (elasticity) Flashcards
what is YED
income elasticity demand
- the responsiveness of demand to a change in price
what is the definition of elasticity
- the responsiveness of one variable to a change in another
what is the effect of a price increase on revenue of an elastic good compared to an inelastic good
- as price increases in the elastic good, revenue reduces but raises revenue for the inelastic good
what does an elastic good look like in a graph compared to an inelastic good
elastic- horizontal
inelastic- vertical
what are the features of relatively elastic demand
- many substitutes
- short term- easier to switch
- effect- consumers will stay at home/day trips so quantity of holiday sales decreases more than the price rise
what are the features of relatively inelastic demand
- few substitutes
- short term- difficult to switch effect- consumers have to pay the higher price
what is the acronym to remember the features of elastic vs inelastic demand
SPLAT
what does the S stand for in SPLAT
- availability of substitutes
what does the P stand for in SPLAT
percentage (%) of income
what does the L stand for in SPLAT
luxury vs necessity
what does the A stand for in SPLAT
addictive/ habit forming
what does the T stand for in SPLAT
time- short term more inelastic
what is YED
income elasticity of demand
- the extent to which demand changes in response to a change in income
how do you calculate YED
%ΔQD / %ΔY
what does a negative YED value mean
- more of an inferior good
what does a positive YED value mean
- more of a normal/ luxury good
what is XPED
cross price elasticity
- the extent to which demand for one good changes in response to a change in the price for another good
what does a positive XPED mean
- it is a substitute and the higher the number the stronger the substitute
what does a negative XPED mean
- it is a complement good and the higher the number the stronger the complement
what is PES
- price elasticity of supply
- the extent to which supply for a good changes in response to a change in price for that good
- ALWAYS POSITIVE
what are some factors affecting the elasticity of supply
- time (immediate, short run, long run)
- raw materials supply
- availability of stock
- spare capacity
- length of production period
- ease of switching production what you produce)
- number of firms and ease of entry
- ease of switching to alternative methods of production (how you produce it)
