Demand Elasticity Flashcards
What does elasticity of demand measure?
How responsive the quantity demanded is when price or income changes.
When is demand considered elastic?
When a change in price/income leads to a larger change in quantity demanded.
When is demand considered inelastic?
When a change in price/income leads to a smaller change in quantity demanded.
What is the formula for Price Elasticity of Demand (PED)?
PED = % change in Quantity / % change in Price
How do you calculate percentage change?
(New - Old) ÷ Old
If PED < 1, is the good elastic or inelastic?
Inelastic
If PED > 1, is the good elastic or inelastic?
Elastic
What are 4 determinants of PED?
Number/closeness of substitutes
Degree of necessity
Proportion of income spent
Time
How does PED affect total revenue if demand is inelastic?
Raising the price increases revenue.
How does PED affect total revenue if demand is elastic?
Lowering the price increases revenue.
Why is PED usually lower for primary commodities than manufactured goods?
Primary commodities have fewer substitutes and are more essential.
Why is PED important for governments?
Taxes on elastic goods reduce demand effectively.
Taxes on inelastic goods increase government revenue.
What does a negative YED value indicate?
The good is inferior — as income increases, demand decreases (e.g. off-brand clothes).
What does a positive YED value indicate?
The good is normal — as income increases, demand also increases.
What are the two types of normal goods?
Necessities
Luxuries
What’s the difference between a necessity and a luxury in terms of YED?
Necessities: 0 < YED < 1 → demand rises slower than income (e.g. vegetables).
Luxuries: YED > 1 → demand rises faster than income (e.g. designer clothes).
How do Engel curves differ for inferior, necessity, and luxury goods?
Inferior goods: curve slopes downward.
Necessities: curve slopes upward but flattens.
Luxuries: curve slopes upward steeply.
How does YED relate to economic sectors?
Primary sector: often has negative YED (e.g. farming).
Secondary and tertiary sectors: usually have positive YED, and grow as incomes rise.
