demand elasticity Flashcards
What is price elasticity of demand?
how responsive the quantity demanded is for a good or service when price changes.
what are the determinants of PED?
- number and closeness of substitutes
- degrees of necessity
- Proportion of income spent on good
- Time
Explain the determinant ‘number and closeness of substitutes’
If there are many similar alternatives to a good, it is easy to switch, making it more price elastic
Explain the determinant ‘Degree of necessity’
If it is very necessary to life, people will still buy it regardless of price, making it more price inelastic
Explain the determinant ‘proportion of income spent on good’
a higher proportion of income spent on the good leads to demand being more elastic.
Explain the determinant ‘time’
In a short timespan, demand for any good is unlikely to change by a lot.
what is the relationship between PED and total revenue?
if good is price inelastic in demand then raising price increases revenue but if elastic than lower prices to get more revenue.
Why is PED important for governments and firms?
- Taxes on inelastic goods will do little to reduce demand, but will be very effective on elastic goods
- Subsidies on inelastic goods will do little to increase demand, but will be very effective on elastic goods
- For firms who want to increase revenue, they could try to determine their goods’ PED and that way see if they should increase or decrease prices
what is income elasticity of demand?
how responsive the quantity demanded is for a good or service when income of consumers changes.
what are the three types of YED?
- inferior goods
- necessities
- luxuries
what happens to demand of inferior goods when income increases?
decreases
what happens to demand of necessities when income increases?
increases but very little
what happens to demand of luxuries when income increases?
increases
does the primary sector have a + or - YED?
-
does the secondary sector have a + or - YED?
+
