chapter 3 Flashcards
Define Price Elastic demand
Measure of the responsiveness of the quantity of good demanded to changes in its price
Formulla of PED
= Percentage change in QD / percentage change in price
Ranges of PED
- Demand is price inelastic : 0<PED<1
- Demand is Price elastic : 1<P<infinity
Special Cases: - Demand is unit eleastic : PED=1
4.Demand is perfectly inelastic : PED=0 - Demand is perfectly elastic: PED=infinity
Draw each range of PED
88 page
Steepness of Demand Curve
Flatter= more eleastic
Steeper= more inelastic
Changing PED at straight line demand curve
At high prices and low quantities: Demand is price elastic
At midpoint : Unit elastic demand
At low prices and large quantities: Deman is price inelastic
Determinants of PED
- Number and Closeness of substitutes
- more the substitutes the more elastic the demand - Necessities versus Luxaries
- Necessities are reletively inelastic
-Luxaries are reletively elastic - Length of time
-more the time period extends the more elastic the demand gets - Portion of income speant of good
- larger the portion of income, more eleastic the demand
Applications of PED
Draw graph of indirect tax ( Pg.95)
- Total revenue
- When demand is elastic, an increase in price causes a fall in total revenue,while a decrease in price causes a rise in total revenue
- When demand in inelastic, an increase in price cuases an increase in total revenue, and a decrease in price causes a decrease in total revenue
- When demand is unit elastic a change in price does not cause any change in total revenue - Firm pricing
- If firm wants to increase revenue at demand elastic than decrease price
-if firm wants to increase revenue at demand inelastic then increase price - Indiresct taxes
- Lower the price elasticity of demand for the taxed goods, the greater the givernment tax revenues
What are primary commodities and manufactured products
Goods arising directly from the use of natural resources or factor of production are primary commodities
Manufactured products are goods produced by labour usually working together with capital as well as raw materials
PED and primary commodities
Draw the graph of the same
Many primary commodities have a relatively low PED because they are necceseties without substitutes
The PED of manufactured products is relatively high because they usually have substitutes
What is Income elastic demand (YED)
Is a measure of the responsiveness of demand to changes in income,and involves demand curve shifts,
Formula of YED
= %change in quantity demanded/ %change in income
How does YED tell if the good is normal or inferior
YED>0: a positive YED indicates that the good is normal and demand and income move in the same direction
YED<0: a negative YED indicates that the good is inferior and the income and demand move is opposite directions
How does YED indicate is the good is a necessity or luxary
YED<1: Necessities, since it is income inelastic demand
YED>1: Luxury, since it is income elastic demand
What is the engle curve
Shows a continuum:at very low incomes a good may be a luxury; as income increases it becomes a necessity and finally at high income it becomes inferior
Draw an engle curve
Pg 101
Applications of YED
- YED and producers: rate of expansion
Higher the YED , bigger the expansion
Lower the YED,smaller the expansion - YED and Sectoral Structure of economy
Agriculture usually is 0<YED<1
Manufacturing usually is 1<YED<infinity
Many services have a reletively higher YED
What is Price Elasticity of Supply (PES)
measure of the responsiveness of the good supplies to changes in its price
Formulla of PES
= %change of quantity supplied/%change in price of good
Ranges of PES
1.Supply is price inelastic: PES<1
2.Supply is price elastic: PES>1
3.Supply is unit ekastic: PES=1
4.Supply is perfectly inelastic: PES=0
5. Supply is perfectly elastic: PES=infinity
Draw graph of each PES range
Pg 105
Determinants of PES
1)Lenght of time
with increase in length of time, PES increases
2)Mobility of factors of production
The more easily products can be shifted, the geater the Yed
3) Spare capacity of firms
The more spare capacity the higher the PES
4Ability to store stocks
Greater ability to store stocks= greater PES
5)Rate at which cost increases
The faster the incease in prcies the more inelastic the PES
