elasticities Flashcards
elasticity definition
the responsiveness of one variable to changes in another
price elasticity of demand
how responsive quantity demanded is to changes in price
formula for PED
% change in QD / % change in price
PED value less than 1
PED inelastic, 1% increase in price leads to a less than 1% fall in demand
PED value 1
unitarily elastic, 1% price increase leads to a 1% fall in demand
PED value greater than 1
PED elastic, 1% increase in price leads to a greater than 1% fall in demand
factors influencing PED
SPLAT
substitutes
proportion of income
Luxury or necessity
addictive
time
income elasticity of demand
the responsiveness of quantity demanded to changes in income
formula for YED
% change in QD/ % change in income
YED less than 1
income inelastic, therefore a necessity
YED greater than 1
income elastic, therefore a luxury
negative YED
Inferior good, a incomes rise demand falls
why do inferior goods exist
when incomes rise people switch to better quality substitutes
positive YED
normal good
how does PED impact total revenue
EIOS
elastic opposite (price increase decreases total revenue) inelastic same (price increase increases total revenue)
cross elasticity of demand
the responsiveness of quantity demanded of one good to a change in the price of another
formula for XED
% change QD of A/ % change Pie of B
Positive XED
substitutes. as price increases of good A, demand increases for good B. same direction of travel
negative XED
compliments. as price increases for good A, demand decreases for good B. Opposite direction of travel.
the greater the XED value…
the closer the substitutes or coplements
XED of 0
no correlation
Price elasticity of supply definition
the responsiveness of quantity supplied to changes in price
formula for PES
% chang QS/ % change price
factors influencing PES
PSSST
Production lag Stock Spare capacity Substitutability of factors
