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Economics > Chapter 8/9/10 > Flashcards

Chapter 8/9/10 Flashcards

Price elasticity of demand/supply + income elasticity

1
Q

What is price elasticity of demand (PED)?

A

How responsive quantity demanded for a product is when price changes.

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2
Q

If a demand curve is straighter is it more or less elastic?

A

Straighter= Less elastic

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3
Q

What’s the difference between elastic and inelastic demand?

A

Elastic- when the change in price is less than change in Qd.
Inelastic- when the change in price is greater than change in Qd.

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4
Q

How do we calculate PED?

A

% change in Qd/ % change in price

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5
Q

If PED < 1 what does it mean? e.g -0.5

A

Inelastic demand

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6
Q

If PED > 1 what does it mean? e.g - 2.5

A

Elastic demand

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7
Q

PED = 0
PED= ∞
PED= -1

A

0- Perfectly inelastic (Vertical graph)
∞- Perfectly elastic (Horizontal graph)
-1- Unitary elasticity

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8
Q

Define unitary elasticity

A

When the responsiveness of demand is proportionately equal to change in price. TR never changes.

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9
Q

What factors effect the PED?

A
  1. Substitutes
  2. Proportion of income
  3. Luxury/necessity
  4. Addictive
  5. Time
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10
Q

How does the availability of substitutes affect the PED of a product?

A

If there are many close substitutes it will be price elastic since consumers will have many options to choose from.

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11
Q

How does the proportion of income spent on the product affect PED?

A

If proportion of income spent is higher, people will be willing to wait for the price to drop so its price elastic.

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12
Q

How does time affect the PED for a product?

A

If goods are needed soon, price is inelastic
If goods can wait till the long-term, price is elastic

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13
Q

What is Price elasticity of supply (PES)?

A

Responsiveness of supply to a change in price

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14
Q

If the supply curve is straighter is PES more or less responsive?

A

Straighter curve= Less responsive

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15
Q

What is the difference between inelastic and elastic supply?

A

Inelastic supply- When change in price is greater than in change in Qs
Elastic supply- When change in Qs is greater than change in price

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16
Q

How do we calculate PES?

A

% change in Qs/ % change in price

17
Q

If PES> 1 what does it mean?

A

Elastic supply

18
Q

If PES < 1 what does it mean?

A

Inelastic supply

19
Q

PES = 0
PES = Infinite
PES = 1

A

0 - Perfectly inelastic (Vertical graph)
Infinite - Perfectly elastic (Horizontal)
1 - Unitary elasticity

20
Q

What factors affect PES?

A
  1. Factors of production
  2. Availability of stocks
  3. Spare capacity
  4. Time
21
Q

How does availability of stocks influence PES?

A

If its impossible/ expensive to hold stocks e.g fruits are perishable, PES= inelastic

22
Q

How does spare capacity influence PES?

A

If there is spare capacity and price for the product increases, producers can increase supply. If there’s spare capacity= PES is elastic.

23
Q

How does time influence PES?

A

If producers can react quickly to change in price (less time needed to increase supply), PES is elastic. If not (e.g. fruits), PES= inelastic

24
Q

How do the factors of production influence PES?

A

If the factors of production can be increased quickly then PES= elastic

25
Q

What is income elasticity of demand?

A

The responsiveness of demand to a change in income

26
Q

How do we calculate for income elasticity of demand?

A

% change in demand / % change in income

27
Q

How can we use Income elasticity of demand to interpret the nature of a product?

A

Basic goods- Income inelastic
Luxury goods- Income elastic
Inferior goods- Negative PES value
Normal goods- Positive PES value

28
Q

When will governments place indirect taxes on products?

A

When the PED is inelastic and they want to make a profit. Or when they want the demand for products (e.g. cigarettes) to be smaller.

29
Q

When will governments provide subsidies to businesses?

A

When they want to increase supply of a product to make the good cheaper. Demand must be price inelastic.

Economics (8 decks)

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