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Chapt 3 (PED) Price Mechanisms & its Applications Flashcards

1
Q

Types of elasticity

A

PED — Price Elasticity of Demand
PES — Price Elasticity of Supply
YED — Income Elasticity of Demand
XED — Cross elasticity of demand

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2
Q

What is PED

A

Price elasticity of demand:

  • it is the measure of responsiveness of QUANTITY demanded of a good or service
  • due to a change in price
  • ceteris paribus
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3
Q

PED formula

Significance of neg sign

A

PED =

   Change in QD (effect) —————————————
   Change in Price (cause)

Neg sign:
- inverse relationship between QD & price
- due to ** law of demand**

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4
Q

Summary Types of PED values for elastic & inelastic goods

A

PED > 1
- Elastic
Eg: Luxury goods

PED < 1
- Inelastic
Eg: Necessities

PED = Infinity
- Perfectly price elastic
- Straight line graph
- When price barely changes, QD increases infinitely

PED = 0
- Price perfectly inelastic
- When prices changes infinitely, QD **stays the same

PED = 1
- Demand is unit price elastic
- Change in price results in proportional change in QD

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5
Q

PED > 1

A
  • Demand is price Elastic
  • Change in price results in more than proportional change in QD
  • Consumers very responsive to changes in price
  • Gradient of demand curve is gentler

Eg: Luxury goods

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6
Q

PED < 1

A

Demand is price Inelastic

  • Change in price results in less than proportional change in QD
  • Consumers not so responsive to changes in price
  • gradient of demand curve is steeper

Eg: Necessities

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7
Q

PED = Infinity

A
  • Demand is Perfectly price elastic
  • Straight horizontal line graph
  • When price barely changes, QD increases infinitely
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8
Q

PED = 0

A

Demand is perfectly price Inelastic

  • When price changes infinitely, QD stays constant
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9
Q

PED =1

A
  • Demand is unit price elastic
  • Change in price results is proportional change in QD
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10
Q

Summary of factors affecting price elasticity

A

Recall HINTS

H — Habit of consumers

I — Income proportion of consumers spent on that that good.

N — Necessity of the good

T — Time Period

S — Substitutes (number and closeness of them

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11
Q

HABIT — Factor affecting price elasticity

5 step elasticity template

A
  • Demand of good is price Inelastic
  • when consumers buy it out of habit
  • Rise in price = less than proportional fall in QD, ceteris paribus
  • consumers not so responsive to changes in price
  • Becuz they are less willing to change their habits

————-
Eg: Cigarettes & alcohol
BUT remember:

Chains smoker / alcoholic :
- price inelastic

Social smoker / drinker (not addicted):
- Price elastic

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12
Q

Income portion consumers spent on good — Factor affecting price elasticity of demand

5 step elasticity template

A

Large portion of income

  1. Define
    - PED is the measure of responsiveness of QD of a good due a change in price (from a change in SS), ceteris paribus.
  2. State PED of good in Qn
    - The price elasticity of demand for (concert tickets) is likely price elastic
    - with PED value being more than 1
  3. Justify why PED elastic or inelastic
    - (Concert tickets) take up a large portion of consumer income
    - This implies that the good is inherently expensive
  • Any percentage increase in price of (concert tickets) causing the absolute price to rise sharply
  • This reduces consumers willingness and ability to buy (concert tickets) as they are sacrificing their ability to buy other goods
  • So customers are more responsive to changes in price
  1. Effect of price on QD
    - when rise in price of (convert tickets), QD falls more than proportionately
  2. **link to change in Equilibrium price & quantity
    5b. Link to change in TR/TE
    _________________________
    Low portion of income spent
  3. Define PED
    - PED is the measure of responsiveness of QD of a good due a change in price (from a change in SS), ceteris paribus.
  4. State PED of good in Qn
    - The price elasticity of demand for (electricity) is likely price inelastic
    - with PED value being in between 0 an 1
  5. Justify why PED elastic or inelastic
    - Consumers spend a small portion of income on (electricity), implying that the good is inherently cheap
    - Any percentage change in price of (electricity) has a small absolute rise in price
    - So consumers are less responsive to changes in price
  6. Effect of price on QD
    - rise in price of (electricity), QD falls more than proportionately
  7. _link to change in Equilibrium price & quantity _
    5b. Link to change in TR/TE
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13
Q

Necessity of the good & It’s Degree— Factor affecting price elasticity of demand

5 step elasticity template

A

Low degree of necessity

  1. Define
    - PED is the measure of responsiveness of QD of a good due a change in price (from a change in SS), ceteris paribus.
  2. State PED of good in Qn
    - The price elasticity of demand for (luxury cars) is likely price elastic
    - with PED value being more than 1
  3. Justify why PED elastic or inelastic
    - becuz when price of (luxury cars) rises, consumers will choose to reduce consumption
    - becuz luxury cars have low degree of necessity
    - So customers are more responsive to changes in price
  4. Effect of price on QD
    - when rise in price of (lux cars) rice, QD falls more than proportionately
  5. **link to change in Equilibrium price & quantity
    5b. Link to change in TR/TE
    ________________________________
    High necessity_
  6. Define PED
    - PED is the measure of responsiveness of QD of a good due a change in price (from a change in SS), ceteris paribus.
  7. State PED of good in Qn
    - The price elasticity of demand for (water) is likely price inelastic
    - with PED value being in between 0 an 1
  8. Justify why PED elastic or inelastic
    - becuz when price of (water) rises, there is a consumers still NEED to consume water
    - becuz need water for survival, it has high degree of necessity
  • So consumers are less responsive to changes in price
  1. Effect of price on QD
    - rise in price of (water), QD falls less than proportionately
  2. _link to change in Equilibrium price & quantity _
    5b. Link to change in TR/TE
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14
Q

Time period — Factor affecting price elasticity of demand
5 step elasticity template

A
  • Longer time period
  • The More price elastic the demand is. PED increases
    ————————————
    Reason:
  • Increase long run, ppl will be more responsive to changes in price
    —-
  • Bcuz it takes time for consumers to adjust their spending habits
  • In long run, rise in price causes more than proportionate fall in QD
    ——
    Eg:
  • Price of petrol rises
  • takes time for ppl to switch to electric cars
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15
Q

Substitutes (closeness & number) — Factor affecting price elasticity of demand
5 step elasticity template

A

Many close substitutes

  1. Define
    - PED is the measure of responsiveness of QD of a good due a change in price (from a change in SS), ceteris paribus.
  2. State PED of good in Qn
    - The price elasticity of demand for (chicken rice) is likely price elastic
    - with PED value being more than 1
  3. Justify why PED elastic or inelastic
    - becuz when price of (chicken rice) rises, the presence of many close substitutes (like other hawker food),
    - allows customers to switch away easily
    - So customers are more responsive to changes in price
  4. Effect of price on QD
    - when rise in price of (chicken rice) rice, QD falls more than proportionately
  5. **link to change in Equilibrium price & quantity
    5b. Link to change in TR/TE
    _________________________
    less close substitutes
  6. Define PED
    - PED is the measure of responsiveness of QD of a good due a change in price (from a change in SS), ceteris paribus.
  7. State PED of good in Qn
    - The price elasticity of demand for (healthcare) is likely price inelastic
    - with PED value being in between 0 an 1
  8. Justify why PED elastic or inelastic
    - becuz when price of (healthcare) rises, there is a lack of close substitutes (like other hawker food),
    - prevents customers from switching away easily
    - So consumers are less responsive to changes in price
  9. Effect of price on QD
    - rise in price of (healthcare), QD falls more than proportionately
  10. _link to change in Equilibrium price & quantity _
    5b. Link to change in TR/TE
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16
Q

Effect of elastic and inelastic PED on Equi price & quantity when SS rises

A
  • SS rises, DD same
  • surplus, Excess stock
  • So price falls
    BUT price fall to what extent?
    ________
    PED > 1 Price Elastic
    Eg: good is a Samsung handphone with close substitutes like Apple, Huawei
  • Fall in price leads to more than proportionate rise in QD
  • Consumers are very responsive to changes in price from rise in SS
  • To reach new Equi price & quantity, only a small fall in price is needed to eliminate surplus
    ____a___\_\_________
    PED < 1 price inelastic
    Eg: Good is petrol. High degree of necessity
    Price:
  • Fall in price causes less than proportionate rise in QD
  • To reach new equi price & quantity, a large fall in price is needed to eliminate surplus

Quantity:
- Less rise in Quantity compared to PED >1

JC Economics (11 decks)

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