Chapter 6: Elasticity - PED Determinants + XED Flashcards
1
Q
What are the four major determinants of PED?
A
- The Availability of substitutes
- Proportion of income
- Luxuries vs Necessities
- Time
2
Q
Why does the availability of substitutes determine PED? (2)
A
- the easier it is for consumers to switch to buying something else (the more substitutes there are), the more elastic the demand will be for a good
- for some goods, this is related to time (point 4)
3
Q
Why does proportion of income determine PED?
A
- The greater the share of one’s budget that is devoted to a good, the greater the PED for that good
4
Q
Why does luxuries vs necessities determine PED? (3)
A
- people are more responsive to price changes if the good is a luxury than if the good is a necessity
- groceries vs restaurant meals
- Diamond rings
5
Q
Why does time determine PED? (2)
A
- The longer the period of time that buyers have to adjust to a price change, the more elastic demand becomes
- Lifestyle substitutes, not just in terms of product but in lifestyle
6
Q
Why does time determine gasoline elasticity?
A
- in long run can alter where we live, where we work, which cars we can buy
note that if gas prices rise, you are not immediately going to change
7
Q
What is cross-price elasticity of demand?
A
- between two goods, measures the effect of the change in one good’s price on the quantity demanded of the other good
8
Q
What is XED equal to?
A
- the percent change in the quantity demanded of one good divided by the percent change in the other good’s price
9
Q
XED formula
A
10
Q
In XED, when are goods substitutes?
A
- When XED is positive
11
Q
In XED, when are goods complements?
A
- when XED is negative
12
Q
What does XED and income elasticity measure? (3)
A
- how much curves shift in response to an external change
- on the graph, holding the price constant. by how much does quantity demanded change due to a shift of the demand curve?
- measures horizontal shift
13
Q
Meanwhile, what doeas PED measure?
A
- Shape of demand curve
14
Q
Why is XED important?
A
- important for businesses’ pricing decisions
- important for govt regulation of mergers and taxation
- Taxation: if the govt decides to place a large tax on alcohol, to their surprise, one of the major lobbyists against such a tax is the anti-marijuana lobby. Why?
