Elasticities Flashcards
What is price elasticity of demand?
The proportional responsiveness of demand to changes in price
What is the formula for PED?
% change in QD / % change in P
Which 5 classes of PED exist and at what values?
- Perfectly inelastic (0)
- Relatively inelastic (0-1)
- Unitary (1)
- Relatively elastic (>1)
- Perfectly elastic (infinity)
What are the 4 main factors influencing PED?
- Availability of substitutes (higher means higher PED)
- Addictiveness of the product (higher means lower PED)
- Price of product as a proportion of income (higher means higher PED)
- Time period (longer means higher PED)
What is income elasticity of demand (YED)?
The proportional responsiveness of demand to changes in income
What is the formula for YED?
% change in demand/ % change in income
What are the 3 types of goods as determined by YED?
- Normal necessity (0-1)
- Normal luxury (>1)
- Inferior good (<0)
Which types of good see a rise in demand during recessions?
Inferior goods
What is cross price elasticity of demand (XED)?
The proportional responsiveness of the demand for a substitute good to changes in prices
What is the formula for XED?
% change in demand for good A / % change in price of good B
What 3 types of relationships between good can be revealed by XED?
- Complementary goods (<0)
- Substitutes (>0)
- Unrelated goods (0)
Why is knowledge of PED important to firms?
Price-setting
Why is knowledge of PED important to the government?
Tax and subsidy levels
Why is knowledge of XED important to firms?
Adjust pricing strategies and analyse competitors’ pricing strategies
Why is knowledge of YED important to firms?
Helps determine what types of goods to sell during recessions and booms
What is the revenue rule of PED?
To maximise revenue, firms should raise prices of inelastic products and drop prices of elastic products
What is price elasticity of supply (PES)?
The proportional responsiveness of supply to changes in prices
What is the formula for PES?
% change in QS / % change in price
Which 5 classes of PES exist and at what values?
- Perfectly inelastic (0)
- Relatively inelastic (0-1)
- Unitary (1)
- Relatively elastic (>1)
- Perfectly elastic (infinity)
What are the 5 main factors influencing PES?
- Mobility of the factors of production (higher means higher PES)
- Availability of raw materials (higher means higher PES)
- Ability to store goods (higher means higher PES)
- Spare capacity (higher means higher PES)
- Time period (longer means higher PES)
What is the difference between short-run and long-run?
In the short-run, at least one of the factors of production is fixed
What are the 4 factors of production?
- Land
- Labour
- Capital
- Enterprise
