Chapter 5 Flashcards
What is price elasticity
How does demand for a product change when its price changes
What is elastic demand?
When a small change in price causes a large change in demand.
PED is smaller than -1.
What is Inelastic demand
When a large change in price only causes a small change in demand.
PED is between 0 and -1.
How to calculate PED (Price Elasticity of Demand)
% change in quantity demanded / % change in price
(The answer is usual a negative number)
What is the non-average arc method (which influences PED)
Step 1- work out percentage change in demand
Step 2 - work out percentage change in price
Step 3 - Calculate PED
How to calculate the Average Arc Method
Step 1: work out the average price.
Step 2: then work out the percentage change by dividing through the average price.
Step 3 : then calculate the PED
What is unit elasticity?
When the PED is -1. This means that the change in price and demand are the same.
Formula for the demand curve
Qd = a - bP
Qd: quantity demanded, where the curve starts on the y axis.
b: the gradient
P: Price
What does it mean when the price is Perfecly Elastic?
Any increase in price leads to a total loss of demand.
This happens when a product has a perfect substitute.
Elastic price =
Any change in price leads to a higher change in demand
Unitary elastic =
Any change in price leads exactly proportional to a change in demand
Inelastic demand =
Any change in price leads to a smaller change in demand.
Perfectly Inelastic good =
Demand is completely unresponsive to changes in price (water may be an example
When could PED be positive?
If it’s a Giffen or Veblen good, where demand increases as the price increases
3 main uses of price elasticity of demand
- Revenue implications
- Production / purchases
- Taxation
Factors influencing price elasticity of demand
- brand loyalty
- % of income spent
- availability of substitutes
- competitor pricing
- habit to use the product
- necessity or Luxor
- time since the last price change
- definition of the market
What is supply elasticity?
How does supply change for a product when its price changes
PES (price elasticity of supply) =
% change in quantity supplied / % change in price
Supply elasticity levels:
0 to 1, means Inelastic
1 means unit elasticity
Above 1, means elastic
Supply curve formula:
Qs = c + dp
Qs = Quantity supplied
C = the point where the curve starts on the X-axis
d = the gradient
P = price
Perfectly elastic supply =
When any change in price from p1 will cause supply to fall to 0.
Perfectly Inelastic supply =
Supply is completely unresponsive to changes in price
Factors that influence price elasticity of supply
- Number of competitors
- Developments in technology
- definition of the market
- availability of the factors of production
- production capacity
- long run v short run
-stock
