Calculating and Interpreting Elasticity Flashcards
Ped calcualtion
%change in quantity demanded/%change in price
Qd2-Qd1/Qd1 * 100
P2-P1/P1 * 100
=
Relatively Elastic Demand
PED > 1
- shape of graph (gentel slope)
percentage change in Qd is greater than the percentage change in price. In other words, there is a more than proportionate change in Qd than price
Relatively inelastic demand
PED < 1
- shape of graph (steep)
occurs when percentage change in Qd is less than the percentage change in price. In other words, there is a less than proportionate change in Qd than price.
Unitary elastic demand
PED=1
- linear completely slanted straight down or concaved
the percentage change in qd is equal to the percentage change in price. in other words, there is an equal proportionate change in qd and price.
perfectly elastic demand
ped = infinity (sign)
qd is extremely responsive to changes in price
graph is a straight line -
perfectly inelastic demand
qd is completely unresponsive to changes in price
PED = 0
shape of graph is | STRAIGHT DOWN
YED CALCULATION
%change in qd/%change in income (Y)
Qd2-Qd1/Qd1 * 100
Y2-Y1/Y1 * 100
= positive (+) or negative (-)
if yed is postive
it is a normal good
as income increases, demand for a normal good increases
these are usually of high quality
yed is negative
as income increases, demand for an inferior good decreases
yed is negative
inferior good
Xed
measures the responsiveness of quantity demanded of one good, Good ‘y’ to a change in the price of another good ‘good x’
xed calculation
%change in qd of good y/% change in price of good x
qd2-qd1/qd1 * 100
p2-p1/p1 * 100
=
interpreting xed
if xed is positive
When XED is positive, the goods are substitutes. This means if the price of one good increases, people will buy more of the alternative good. The higher the XED the closer the substitutes
XED is negative
complements
When XED is negative, the goods are complementary i.e. they are used together. This means if the price of one goes up, people buy less of the other good. Equally if the price of one good goes down people buy more of the other. For example if the price of PS4 consoles go down, people will buy more PS4 games.
pes calculation
% change in qs/% change in price
qs2-qs1/qs1 * 100
p2-p1/p1 * 100
=
interpreting pes
ignore the sign because there is a positive relationship between quantity supplied and price
elastic supply
pes > 1
/- shape of graph (gentle)
supply is mainly responsive to changes in price. where percentage change in qs is greater than percentage change in price.
inelastic supply
pes < 1
supply is not very responsive to changes in price. %CHANGE IN QS IS LESS THAN %CHANGE IN PRICE
graph shape / steep
unitary elastic supply
PES=1
percentage change in qs is equal to percentage change in price
linear /
perfectly elastic supply
pes = infinity
qs is radically responsive to changes in price
graph is straight across -
totally inelastic supply
pes = 0
supply is completely unresponsive to chnages in price
graph is straight down |
factors affecting XED
- BRAND LOYALTY- IF THERE IS BRAND LOYALTY FOR A GOOD, THE XED FOR SUBSTITUTE GOODS ARE LOW
- SUCCESSFUL MARKETING CAMPAIGNS THAT MAKE A PRODUCT APPEAR UNIQUE WILL RESULT IN A LOW XED TO OTHER SUBSTITUTES
- IF TWO GOODS HAVE NO RELATIONSHIP TO EACH OTHER, XED = 0
When interpreting elasticity
separate the equal sign from the numerical value. if there is no sign, a positive value is understood
