elasticities Flashcards
what does price elasticity of demand measure
the responsiveness to a change in price of demand
what does income elasticity of demand measure
the responsiveness of demand to a change in income
what cross elasticity of demand measure
the responsivensss of demand of good A when the price of substitute or complementery good B changes
what is the formula for price elasticity of demand
%change in Qd/
%change in P
what is the formula for income elasticity of demand
%change in Qd/
%change in Y
what is the formula for cross elasticity of demand
%change in Qd of good A/
%change in P in good B
when is demand price inelastic
when PED < 1
when is demand price elastic
when PED > 1
when is demand of unitary price elasticity
when PED = 1
when is demand perfectly elastic
when PED = infinity
when is demand perfectly inelastic
when PED = 0
what does elastic demand look like
a small change in price causes a large change in the quantity demanded
what does inelastic demand look like
a change in price doesn’t change the quantity demanded much
how does the availability of substitutes affect the PED
the more substitutes there are, the higher price elasticity will be
how does the share of a person’s budget affect the PED
if the cost of the product takes up a large share of a person’s disposable income, its price elasticity will be higher
how does how addictive a product is affect the PED
the more addictive a product is, the lower the price elasticity
what type of demand occurs in complementary goods
joint demand
what type of demand occurs in substitute goods
competing demand
describe the relationships between the quantity demanded and the price in joint demand (cross elasticity of demand)
-as the QD of good A increases, the QD of good B also increases because they have joint demand
-as the price of good A increases then the QD demanded of good B decreases
is the cross elasticity of demand for complementary goods positive or negative
the cross elasticity of demand for complementary goods is always negative because the demand for one good decreases when the price for the complementary good increases
describe the relationships between the quantity demanded and the price in competing demand (cross elasticity of demand)
-as the QD of good A increases, the QD of good B decreases because they are in competing demand
-as the price of good A increases the QD of good B also increases
is the cross elasticity of demand for substitute goods positive or negative
the cross elasticity of demand for substitute goods is always positive because the demand for one good increases when the price for the substitute good increases.
what is the relation between supply and price on the supply curve
supply is positively related to price
why is there a positive relation between supply and price
supply goes up as the price goes up because firms are assumed to be profit maximisers - they will supply more if a higher price can be achieved
what leads to movement along the supply curve
changes in price lead to movement along the supply curve
what are factors (other than price) that cause shifts in the supply curve
-costs of production (wages, materials, energy, borrowing costs)
-availability of technology
-taxes
-subsidies or grants given by the government
-weather (farming)
-geopolitics
what would happen to the supply curve if wages increased
shift left
what would happen to the supply curve if there was an improvement in technology
shift right
what would happen to the supply curve if raw material costs increased
shift left
what would happen to the supply curve if government gives a grant
shift right
what would happen to the supply curve if there were taxes
shift left
what effect do specific taxes have on the supply curve
SHIFT left
what effect do ad valorem taxes have on the supply curve
increase in gradient / steeper line
when is the price elasticy of supply elastic
when the good is easily accessible and doesn’t take a long time to produce
