Chapter 6 Flashcards
What does the term elastic mean
When PED is less than -1, very responsive to changes in price.
What does the term inelastic mean
When the PED is 0- (-1), not as responsive to changes in price
What does PED stand for
Price Elasticity of Demand
What is the formula for PED
%change in quantity demanded / %change in price
A steep gradient means
inelastic
A steady gradient means
elastic
What is PEDs definition
a measure of the sensitivity of quantity demanded to a change in the price of a good/service
What does the PED value of (-1- 0) mean
Inelastic
What does the PED value of (<-1) mean
Elastic
What does the PED value of (-1) mean
Unit Elastic -
Will the PED always be negative? True or False
True - because the demand curve is downward sloping
Why PED is important to firms?
If the firm is considering changing its prices, it will tell them the extent to which demand will be affected
For PED unit elastic: If price increases, total revenue would….. For a price decreases, total revenue ……
Does not change, Does not change
Factors that influence PED
Substitutes
Percentage of income
Luxury or necessity
Addiction
Time
(SPLAT)
What does YED stand for
Income Elasticity of Demand (YED)
What is the definition of YED
A measure of the sensitivity of quantity demanded to a change in consumer incomes
What is the formula for YED
%change in quantity demanded / %change in consumer income
What does the YED value of (<-1) mean
Elastic inferior good
What does the YED value of (-1 - 0) mean
Inelastic inferior good
What does the YED value of (0 - 1) mean
Inelastic normal good
What does the YED value of (>1) mean
Elastic Luxury(Normal) good
YED helps firms as it can
Reduce information failure, Allows for more rational decision making. Helps forecast changing demand if incomes rise or fall - knowing what type of good is useful
What does XED stand for
Cross Elasticity of Demand
What is the definition of XED
a measure of the sensitivity of quantity demanded of a good or service to a change in price of some other good or service
What does the XED value of (<-1) mean
Strong complement
What does the XED value of (-1 - 0) mean
Weak complement
What does the XED value of (0 - 1) mean
Weak substitute
What does the XED value of (>1) mean
Strong substitute
What does the XED value of (0) mean
No relationship
What does PES stand for
Price Elasticity of Supply
What is the definition of PES
a measure of the sensitivity of quantity supplied of a good or service to a change in the price of that good or service
PES is always positive? True or False
True
What does the PES value of (>1) mean
Elastic
What does the PES value of (0 - 1) mean
Inelastic
What does the PES value of (1) mean
Unitary elastic
What does the PES value of (0) mean
Perfectly inelastic
What does the PES value of (infinity) mean
Perfectly elastic
What does a perfectly inelastic supply mean
a situation in which firms can supply only a fixed quantity, so cannot increase or decrease the amount available; elastic of supply is 0
What does a perfectly elastic supply mean
a situation in which firms will supply any quantity of a good at a going price; PES value is infinite
How does XED help firms
Helps to anticipate changing demand if prices of other products change. Helps firms be aware of close substitutes and complements therefore who their competitors are
