Elastcity Flashcards
What is price elasticity
Elasticity = responsiveness
How do you calculate the price elasticity of demand
Percentage change in quantity demanded/ percentage change in price
Is price elasticity always positive or negative
Negative but presented as a positive number
How do you resolve the problem of getting different price elasticities when price increases or decreases
Calculate price change based on average of initial and final price
Calculate quantity change based on average of initial and final quantity
What is the PED formula
Change in P /change in Q x p1 + p2/q1+q2
What is in elastic
Below one unit elastic
What is unit elasticity
1 unit
What is elastic
Above 1 unit
What factors influence price elasticity of demand
Availability of substitutes
Whether product is a necessity or luxury
Narrowness or broadness of the definition of the product
Amount of time that elapses
Proportion of income spent on the product
What is total revenue
Price x quantity
How does the demand price elasticity influence their decision to increase prices or not
If demand is elastic - a given percentage price increase will cause a more than proportional decrease in the quantity demanded and revenue would decrease
If demand is price inelastic - given percentage price increase will cause a less proportional decrease in quantity demanded and revenue would increase
What is price elasticity of supply
The extent suppliers change the quantity supplied in response to a change in price of product
Formula of PES
Change in Q/change in P x p1+p2/q1+q2
What factors influence price elasticity of supply
Time
Supply is less elastic in the short run
Supply is more elastic in the long run
What is cross price elasticity of demand
What happens to demand for a product if a company sells a substitute of complementary product reduces price
Ced formula
Percentage change in quantity of product / percentage change un price of a substitute or compliment
Change in Qx/ Change in Py x py1+py2/qx1+qx2
What signs are used for substitute and compliment
Substitute is positive
Compliment is negative
What is income last city of demand
What percentage does demand for product change in response to a 1% change in income
IED formula
Percentage change in quantity demanded / percentage change in consumers income
Change in Q/change in income x y1+y2/q1+q2
How to interpret income elasticity of demand
Less than zero - inferior product
More than zero - normal product
Less the one : necessity
More than one : luxury
What does elasticity do
Help us understand how people respond to changes in prices and incomes
Quantify law of demand
Helpful for guiding government policy
