Demand Elasticity Flashcards
Elasticity
Responsiveness - how much something changes when there is a change in another determinant
Price elasticity of demand
Degree of responsiveness of the quantity demanded of a good or service when the price changes
What is price elasticity affected by?
Availability of substitutes - plenty of substitutes, price sensitive good, few substitutes, price-insensitive good
How to calculate price elasticity?
% change in quantity/% change in price (q1-q0/qo/p1-p0/p0)
Inelastic demand
Change in price causes a less than proportionate change in quantity demanded, steep gradient
Unitary elasticity
Change in price causes an exact proportionate change in quantity demanded, 45* angle
Elastic demand
The change in price causes a more than proportionate change in quantity demanded, not a steep gradient
What does elasticity vary between?
Infinity and zero
What does elasticity vary on a demand curve?
Based on the size of the percentage change of quantity and demand.
What are the two demand elasticity extremes?
When ep=0 as is a necessity for survival, line is vertical. When ep=infinity, line is horizontal as unlimited demand.
What are the 4 determinants of price elasticity?
S T I L
Availability of substitutes, time span, proportion of income spent, luxury or necessity
Explain availability and closeness of a substitute as a determinant of price elasticity
When there is a large number of close substitutes, the demand is very elastic as when price goes up a small amount, demand drops by a large amount
Explain time span as a determinant of price elasticity
In the short term, goods are inelastic as not many alternatives. In the long run, alternative may become available and good becomes elastic
Explain proportion of income spent on good/service as a determinant of price elasticity
If proportion of income spent on good is small, change in price will have a less than proportionate effect on the quantity demanded. Depending on a persons income, a good can be elastic or inelastic
What is an elastic good?
When the price changes by a small amount, the quantity demanded changes by a big amount - price sensitive good
What is an inelastic good?
When the price changes by a small amount, the quantity demanded changes by a small amount - price insensitive good.
TR
Total revenue
How to calculate TR
Price x quantity
As price increases, total revenue increases -what type of good?
Inelastic good (necessity)
As price increases, total revenue is equal, what type of good?
Unitary
As price increases, total revenue decreases - what type of good is it?
Elastic good (luxury/wants)
Why is a firm interested in elasticity?
FIrms see the impact of total revenue change when price changes
Why is the government interested in elasticity?
Understand the implications of imposing taxes and subsidies of goods.
Primary commodities
Goods that may be grown or come from nature ie wheat, minerals, cotton.
Are primary commodities elastic or inelastic?
Inelastic as there is few substitutes
Manufactured products
Goods created using capital from primary commodities. Tend to have more substitutes available so are more elastic
What does income elasticity of demand measure?
Degree of change of Qd when Y changes
Normal good
Necessities and luxuries
Inferior goods
Quantity demanded falls when income increases
Engel curve
Curve that shows relationship between income and the demand for a product over time
Why is an engel curve shaped the way that it is?
As income increases, consumers purchase more of normal goods. As income continues to rise, the normal good becomes inferior as they switch to luxury.
