Elasticities Flashcards
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What is elasticity?
How responsive something is to a change in something else. It measures how easily consumers or producers can change their behaviors.
Price elasticity of demand (PED)
Responsiveness of a quantity demanded to a change in price, ceteris paribus
Graph of Elasticities
Coefficients for PED
PED is negative?
- they are inversely related (e.g. as one goes up, the other goes down)
- they are positively related. Usually these are exceptions to the law of demand such as Giffen goods or Veblen goods.
/PED/ > 1 = Elastic or relatively elastic
/PED/ < 1 = Inelastic or relatively inelastic
/PED/ = 1 = Unit elastic (proportionally related)
PED = 0 = Perfectly inelastic
PED is infinite = Perfectly elastic
Note: There is no negative PED value, so if it is negative, take the absolute value of it.
Determinants of Price elasticity
Substitutes
Proportion of income
Luxury or necessity
Addictiveness
Time to respond
Income of elasticity of demand (YED)
Responsiveness of a quantity demanded to a change in consumers’ income, ceteris paribus.
Coefficient of YED
If YED is negative (0) = They are normal goods
If YED > 1 = income elastic (high elasticity = less essential, more superior/luxury, or services)
If YED < 1 = income inelastic (low elasticity = more essential, necessities)
If YED = 1 = Unit income elastic (proportionate change)
If YED = 0 = Perfectly income inelastic OR Zero income elasticity (no change in demand if there is a change in income)
Note - The +/- sign is important!
It can also be negative (refers to the type of good) and income elastic/inelastic (how responsive is demand) - use absolute value.
Importance of YED for explaining changes in the sectoral structure of the economy (HL)
Primary sector - agricultural goods, oil, gas, fruits, vegetables
- YED inelastic
- Exception: diamonds
Secondary sector - manufactured goods, electronics
- YED elastic
Tertiary sector - services like tourism, restaurants, private education/healthcare
- YED elastic
- Exception: education, healthcare, law enforcement
Price elasticity of supply (PES)
Responsivenes of a quantity supplied to a change in price, ceteris paribus.
If PES > 1 Supply elastic (relatively supply elastic - greater than proportionate change)
If PES < 1 Supply inelastic (relatively supply inelastic - less than proportionate change)
If PES = 1 Unit supply elastic (proportionately related)
If PES = 0 Perfectly Supply inelastic
If PES = infinite Perfectl Supply elastic
Determinants of Supply elasticity
Costs
* how much cosgts rise per unit as output is increased
* excess capacity (unused)
* Mobility as FOP
Time period of production considered
* time to respond ot change in price
* more time = more elastic
Complexity to produce
* more complex = more inelastic
storability
* less storability = inelastic
Number and closesness of Factor (supplier/producer) substitutes
* the easier to change to a different subsitute = the more elastic
Easy way to remember determinants of PES
T - time to produce and time to respond to change in price
I - inventory (stocks) - storability
C - Capacity
C - Costs (marginal costs)
S - Subsitution for FOP
PED & PES of primary commodities (and agricultural goods/raw materials) vs. manufactured goods (HL)
Price (demand) elasticity: Food is necessary for survival. As such, agricultural goods are price inelastc. Quantity demanded will not be responsive to changes in price.
Supply elasticity: Agricultural goods are supply inelastic - take a long time to produce
Income elasticity: as income increases, the proportion of income spent on food will stay fairly constant. Food and thereby agricultural goods are income inelastic.
What are the implications of falling agricultural prices in LDCs?
LDCs don’t have the money for the new technology so working at the old curve but at the new price. Even if they are able to produce more and more of the good, the price is falling so rapidly, their incomes will keep falling.
Revenue Boxes (Inelastic vs Elastic)
PES Diagram
