elastcities Flashcards
inelastic demand
even if price increases or decreases demand remains the same /stable this includes necessity items and where there is limited substitutes
demand is not very responsive to changes in prices
elastic demand
-this is where quantity demanded of product all service is highly responsive to changes in prices if the price of the product increases the demand decreases and if the price decreases demand increases this is when there is many substitutes and the products are non essential
PED
price elasticity of demand measures the responsiveness of quantity demanded given a change in demand
formula PED
% change quantity demanded/ %change price
price elastic
> 1 greater than one-demand is price elastic, quantity demanded changes more than price
price inelastic
<1 smaller than one-demand price inelastic, the quantity demanded change is less than price.
demand perfectly price inelastic
0 demand perfectly price inelastic-regardless of the price changing quantity demanded won’t change
perfectly price elastic
(infinate) demand perfectly price elastic-in extreme examples if perfectly elastic any change in price would have no impact on the quantity demanded.
unitary elastic
1 demand is unitary elastic the value of PED is exactly 1 ignoring the minus for example a decrease in the price of a phone by 10% increases the demand by 10%
examples of:
Elastic demand
Inelastic demand
Unitary elasticity
Perfectly price inelastic
Perfectly price elastic
Luxury items
Food, medicine, utilities
Price increases by 10% and quantity demanded increases by 10%
Life saving medicines, addictive substances
Not essential but when price rises people still willing to pay
Clothes ,electronics price increases find alternatives
YED
measures the responsivness of quantity demanded given a change in income
formula
% change in quantity demanded/ % change in income
normal goods relation to income and demand
positive +, if income increases demand increases
inferior goods relation between income and demand
- inverese relation,income increases demand decreases
normal luxury
bigger than 1 demand is income elastic, increase income increases demand but by alot more, didnt previously purchase
normal necessity
less than 1, demand is income inelastic, increase in income increases demand but not by as much as income increases by- might by slightly more - used to buy before
less than one - inferior goods
demand is income inelastic
greater than one - inferior goods
demand is income elastic
demand is 0
demand is perfectly priced ineastic
XED
Cross elasticity of demand is the responsiveness of a change in demand of one good, X, to a change in price of another good, Y.
formula XED
% change in quantity demanded of X/ % change price of Y
complementry goods
Complementary goods have a negative XED. If one good becomes more expensive, the quantity demanded for both goods will fall.
strongly related complemntary goods
strongly related complements: a small fall in the price of good X leads to a large increase in QD of Y, demand between goods is price elastic price one good changes, quantity demanded for others will change proportionally more. >1
weakly related compliments
Weakly related complements: a large fall in the price of good X leads to only a small increase in QD of Y. <1
Demand between goods are price inealstic price one good changes quantity demanded for other change proportionally less.
substituites
Substitutes can replace another good, so the XED is positive and the demand curve is upward sloping. If the price of one brand of TV increases, consumers might switch to another brand.
strongly related substitutes
strongly related substitutes: a small increase in the price of good X leads to a large increase in QD of Y. >1 price elastic.
weakly related substitutes
a large increase in the price of good X leads to a smaller increase in QD of Y.<1 ineastic price
Unrelated goods
Unrelated goods have a XED equal to zero. For example, the price of a bus journey has no effect on the demand for tables.
why are firms interested in the XED
Firms are interested in XED because it allows them to see how many competitors they have. Therefore, they are less likely to be affected by price changes by other firms, if they are selling complementary goods or substitutes.
0- perfectly price inelastic (xed)
0- perfectly price inelastic demand between goods has no relationship
price elasticity of supply definition
measures the responsivness of quantity supplied to a change in price, reflects the ability of producers to change their output following a change in demand
what happens when supply id price elastic
producers can respond quickly and easily to changing demand without the need for a rise in market price
formula PES
% change in quantitity supplied / % change in price
elastic supply ……..
firms can increase supply quickly at little cost, PES more than 1
explain elastic supply
a large change in demand from d1 to d2 where we are able to increase quantity from q1 to q2 with only a small change in price.
situations where supply may be elastic
- supplier has pleanty of spare capacity to increase output
-high stock levels -immediately avaliable to meet rising demand
-short production time phrame( mass production )
-ease of factor subsitution is high, labour and capital are more mobile, transfereeable skills
inelastic supply
an increase in supply will be expensive for firms and take a long time. PES is less than 1
explain inelastic supply
limited increase in ouput from q1 to q2 when there is a big increase in demand from d1 to d2 and there is a signifiicant increase in market price rather than quantity supplied
perfectly inelastic supply
pes=0, supply is fixed, no change in demand, it cannot be met easily
perfectly elastic
pes= infinity, any quantity demanded can be met without changing price
