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Eduqas A-Level Economics: Microeconomics > Elasticities > Flashcards

Elasticities Flashcards

1
Q

Elasticity

A

Responsiveness of one variable to changes in another

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2
Q

Elastic

A

Change in one produces a larger change in the other

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3
Q

Inelastic

A

Change in one produces a smaller change in another

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4
Q

Price elasticity of demand?

A

Responsiveness of the quantity demanded to a change in price

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5
Q

How to calculate PED?

A

Percentage change in QD/ Percentage change in price

Omit the minus sign always

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6
Q

Perfectly price inelastic demand?

A

PED = 0
Change in price has no effect on QD
Vertical demand curve

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7
Q

Price inelastic demand

A

PED > 0 but PED <1
Price causes a less than proportional change in QD

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8
Q

Price elastic demand

A

PED > 1
Price cases a more than proportionate change in QD

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9
Q

Unit elastic demand

A

PED =1
Price causes same but opposite % change in QD

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10
Q

Use of PED

A

Can be used to assess the impact of a price change on total revenue.

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11
Q

Relationship between PED and total revenue

A
  1. When demand is price elastic, a fall in price leads to a rise in total revenue.
  2. When demand is price inelastic, a fall in price leads to a fall in total revenue.
  3. When demand is unit elastic, total revenue stays the same regardless of price changes.
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12
Q

Determinant of PED

A
  1. Availability and closeness of substitutes – more substitutes and closer ones means that demand will be price elastic.
  2. Marker width -> the narrower the market definition, the more demand will be price elastic.
  3. The time period -> PED is more inelastic in the short term and elastic in long erm as it takes time for consumers to change their patterns.
  4. Method of payment e.g. auto added to bill.
  5. Necessity of the good from consumer perspective -> if it is deemed a necessity then demand will be price inelastic.
  6. Expense of the good in respect to income: goods which represent a small share tend to have more price inelastic demand.
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13
Q

Income elasticity of demand (YED)

A

Responsiveness of demand for a good to a change in consumer income

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14
Q

How to calculate YED?

A

% change in QD/ % change in income
Sign ( + or -) is important

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15
Q

Positive YED

A

Normal goods > consumer incomes increase, demand increases

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16
Q

Negative YED

A

Inferior goods > Consumer incomes increase, demand will increase

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17
Q

Normal and inferior goods

A

A good can be both, it depends on consumer incomes and how people value things

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18
Q

If YED is greater than 1 or less than -1

A

Demand is income elastic

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19
Q

If YED is between 1 and -1

A

Demand is income inelastic

20
Q

Luxury (superior) goods

A

Usually have a high positive YED (2+)

21
Q

If YED is = 0

A

Demand is unresponsive to changes in consumer income

22
Q

Uses of YED

A

Gives indication for businesses

High YED = Demand is sensitive = risky to invest

23
Q

Cross-price elasticity of demand (XED)

A

Measures the responsiveness of demand for one good to a change in demand for another

24
Q

How to calculate XED?

A

% Change in QD for good X/ % Change in price of good Y

25
Q

If XED = 0 then?

A

The goods are independent, there is no effect on each other

26
Q

If XED is positive?

A

Goods are substitutes, the larger the value the stronger the substitute

27
Q

If XED is negative?

A

Goods are complements, the larger the value the stronger the complement

28
Q

If XED is between +1 and -1

A

XED is price inelastic

29
Q

If XED is more than +1 and less than -1?

A

XED is price elastic

30
Q

What does XED show?

A

Impact of your own and competitors price changes on yours and your competitors goods demand and revenue.

31
Q

If XED is high and positive ?

A

Price cuts can be used to steal market shares from rival firms, but dangerous if prices are increased.

32
Q

How can XED give an insight on complementary goods?

A

Can show the impact of price changes and how to then maximise revenue

33
Q

Price Elasticity of supply

A

Measures the responsiveness of quantity supplied to a change in price of a good

34
Q

How to calculate PES?

A

% Chane in quantity supplied/ % change in price

35
Q

PES is always…?

A

Positive

As price rises, quantity supplied rises as it leads to an increase in profit potential

36
Q

Perfectly price inelastic supply

A

PES = 0

Vertical supply curve

37
Q

Perfectly price elastic supply

A

PES = Infinity

Horizontal supply curve

38
Q

Price inelastic supply

A

PES > 0 but PES < 1

(Change in price creates a less than proportional change in supply)

39
Q

Price elastic supply

A

PES > 1

(Change in price creates a more than proportional change in quantity supplied)

40
Q

Straight line passing through the origin has a PES of …?

A

1

40
Q

Unitary price elastic supply

A

PES =1

(Change in price creates same change in quantity supplied)

41
Q

(1) Determinants of PES

A

More substitutes = Higher PES

42
Q

(2) Determinants of PES

A

Longer time frame

Price elastic - firms can adjust their resources to change output

Shorter production time means supply will be more price elastic

43
Q

(3) Determinants of PES

A

More stock and factors of production available (spare capacity or labour) the more supply will be price elastic

44
Q

(4) Determinants of PES

A

More total costs rise, the more supply will be price inelastic

45
Q

Uses of elasticities

A

Firms planning or decisions for investment/hiring.
Decision on price strategies – whether to increase or decrease prices.
Competitor pricing decision
Recession means inferior goods booms - Luxury good firms suffer.
Taxation  Effects of indirect taxes and subsidies
Changes in exchange rates => The impact of changes in the exchange rate on demand for imports and exports
Government intervention -> may intervene in market by introduction minimum or maximum prices e.g., minimum price for alcohol.
Elasticity of demand supply also affects operation of the price mechanism as a means of rationing scarce goods and services among competing uses and in determining how producers respond to the incentive of a higher market price.

Eduqas A-Level Economics: Microeconomics (7 decks)

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