Chapter 4 Flashcards
What does price elasticity of demand measure?
The responsiveness and sensitivity of consumers to a price change is measured by a products price elasticity of demand
What is price elasticity of demand?
Price elasticity of demand is a tool to measure the responsiveness of quantity demanded to changes in price and to help suppliers in decisions. By how much does quantity demanded change due to a change in price
What is elasticity?
Elasticity means the responsiveness or sensitivity
What is relative elastic?
When a modest change in price causes a large change in quantity demanded it is relatively elastic
What is relative inelastic?
When there is a substantial change in price that causes a small change in quantity demanded it is relatively inelastic
What is the calculation of price elasticity of demand?
Price elasticity of demand calculation : PED= % change in Qd / % change in P
What is constant about price elasticity demand equation?
Price elasticity demand is an equation that must be negative due to the law of demand.
It measures the sensitivity of the change in demand between two points due to a price change.
Why do you use percentage rather than absolute values in price of elasticity demanded?
We use percentage rather than absolute values in measuring consumers responsiveness because if we use absolute changes, the choice of units will arbitrarily change affect our impression of buyer responsiveness and because by using percentage we can compare consumers responsiveness to changes in the prices of different products.
When and why do we ignore the negative sign of price elasticity of demand?
In price elasticity of demand we ignore the minus sign that shows the relationship between price and quantity. This means at the end of the equation all elasticity of supply coefficients therefore are positive numbers.
What is perfectly inelastic quantity demand?
Perfectly inelastic is when the quantity demanded does not change if the price increases or decreases, there is no response to price. The PED = 0. The demand curve will be a vertical line (ll). These are items that are always in demand, water and medicine.
What is unit elastic quantity demanded?
Unit elasticity is when PED = 1 because the percentage change of price and quantity demanded is equal. These are items that are necessary in the modern world
What is relative inelasticity quantity demanded?
Relative inelasticity is when the PED is greater than 0 but less than 1 (Ed<1), the demand curve will be steeper. These are for items that are necessities.
What is relative elasticity quantity demanded?
Relative elasticity is when the PED is greater than 1 but less than infinity (Ed>1), the demand curve has a falter curve and the quantity demanded change is big when there is a change in price. These are for items that are substitutes, luxury goods.
What is perfect elasticity quantity demanded?
Perfect elasticity of when PED equals infinity (PED=), when there’s even a small change in price, there is an infinite change in quantity demand. The demand curve is horizontal (–). These are items with perfect substitutes, they are many identical products for goods
What’s the difference between inelastic and elastic?
Elastic refers to a small change in Qd while inelastic refers to a small change in Qd
How does price elasticity and business decisions relate?
Price elasticity helps make pricing decisions, this will depend on if the good is demand elastic or inelastic
What is the importance of elasticity in relation to revenue?
The importance of elasticity for firms relates to the effect of price changes on total revenue and thus on profits. Total revenue is the amount the seller receives from the sale of the product in a particular time period
What is the total revenue calculation?
Total Revenue = Price x Quantity demand
What is the total revenue test of elastic demand?
If the total revenue changes in the opposite direction from price, demand is elastic. A decrease in price will increase total revenue. Ceteris paribus, when price and total revenue move in opposite directions demand is elastic
What is the total revenue test of inelastic demand?
If the total revenue changes in the same direction as price, demand is inelastic. A price decrease will reduce total revenue. The increase in sales will not fully offset the decrease in price and total revenue will decline. Ceteris paribus, when price and total revenue move in the same direction, demand is inelastic.
What is the total revenue test of unit elastic demand?
If the total revenue does not change when prices change, demand is unit elastic. An increase or decrease in price leaves total revenue unchanged. Ceteris paribus, when price changes and total revenue remains constant, demand is unit elastic
What are the determinants of price elasticity of demand?
Determinants of PED:
1. Substitutability
2. Proportion of income
3. Luxuries versus necessities
4. Time
What is substitutability as a determinate of price elasticity of demand?
Substitutability is that the larger the number of substitute goods that are available, the greater the price elasticity of demand. This depends on how narrowly the product is defined
What is proportion of income as a determinate of price elasticity of demand?
Ceteris paribus, the higher the price of a good relative to consumers incomes, the greater the price elasticity of demand
What is luxury rather than a necessity as a determinate of price elasticity of demand?
The more a good is considered to be a luxury rather than a necessity, the greater is the price elasticity of demand
What is time as a determinate of price elasticity of demand?
Product demanded is more elastic the longer the time period under consideration. Consumers often need time to adjust in prices due to product durability.
What is cross elasticity of demand?
Cross elasticity of demand (XED) measures how sensitive consume purchase of one product (product X) are to a change in the price of some other product (product Y)
How do you calculate cross elasticity of demand?
Exy= %Qd of X / %P of Y
What is the positive cross elasticity coefficient?
In substitute goods when the price of the one good increases/decreases the quantity demanded of the substitute good increases/decreases and the XED will always be positive. The larger the positive cross-elasticity coefficient, the greater is the substitutability between the two products.
What is the negative cross elasticity coefficient?
In complementary goods when the price of one good decreases/increases the quantity demanded of the other will increase/decrease. The XED will always be negative. The larger the negative cross-elasticity coefficient, the greater are the complementarities between the two goods.
What is the zero cross elasticity coefficient?
In independent goods when a zero or near zero cross elasticity suggests that the two products being considered are unrelated or independent goods.
What is income elasticity?
Income elasticity of demand (YED) does not take into account the price it measures the degree to which consumers respond to a change in their incomes by buying more or less of a particular good
How do calculate income elasticity?
Ei= %Qd of X / % of Y (income)
What is the positive income elasticity?
Normal goods are when your income increases and your quantity demanded increases as well. The YED will always be positive, meaning the more of them are demanded as incomes rise.
What is the negative income elasticity?
Inferior goods is when your income increases your quantity demanded of that good decreases. The YED will always be negative, meaning consumers decrease their purchase of inferior goods as incomes rise.
