Elasticities Flashcards
What equation is used to calculate PED?
PED = percentage change in quantity demanded / percentage change in price.
Between what values is demand for a product price inelastic?
Between 0 and 1.
For what values is demand for a product price elastic?
When the PED value is more than 1.
For what value is PED price unit elastic?
When PED equals 1.
What values of PED are given when demand for a product is perfectly price elastic and inelastic, respectively?
Perfectly elastic = ∞.
Perfectly inelastic = 0.
What factors may affect the price elasticity of demand?
- Availability of substitutes.
- Proportion of income spent on a product.
- Degree of Necessity of product
- Durability of product.
- Length of time under consideration.
- Breadth of definition of a product.
How is PED significant to firms?
If a firm knows whether the price elasticity of demand for a product is elastic or inelastic then they know whether increasing or decreasing prices will result in a higher total revenue.
How is PED significant to the government?
If a government wishes to maximise it’s tax revenue then it may increase it’s taxes on goods whose demand is price inelastic.
Define Cross Elasticity of Demand (XED).
Cross elasticity of demand is a measure of the sensitivity of the quantity demanded of one product to a change in the price of another product.
What equation is used to obtain a value for XED?
XED = percentage change in quantity demanded of product Y / percentage change in price of product X.
If an XED value is positive, what link is there between the two products?
The products are substitutes for one another.
If an XED value is negative, what link is there between the two products?
The products are compliments for one another.
Define Income Elasticity of Demand.
Income elasticity of demand is the sensitivity of the quantity demanded of a product to a change in real income.
What equation gives a value for YED?
YED = percentage change in quantity demanded / percentage change in real income.
What does a positive value of YED indicate?
That the good is a normal good.
What does a negative value of YED indicate?
That the good is an inferior good.
Define Price Elasticity of Demand (PED).
Price elasticity of demand is a measure of the sensitivity of the quantity demanded of a product to a change in it’s own price.
Define Price Elasticity of Supply.
Price elasticity of supply is a measure of the sensitivity of supply of a product to a change in it’s price.
What equation gives a value to PES?
PES = percentage change in quantity supplied / percentage change in price.
What factors affect price elasticity of supply?
- Time
- Stocks
- Spare capacity
- Availability and cost of switching resources from one use to another.
Define consumers’ surplus.
Consumers’ surplus is the difference between how much consumers are willing pay and what they actually pay for a product.
How is consumers’ surplus shown diagrammatically?
It is the area under the demand curve and above the market price.
Define producers’ surplus.
Producers’ surplus is the difference between the cost of supply and the price received by the producer for the product.
How is producers’ surplus shown diagrammatically?
It is the area between the supply curve and the market price.
How is availability of substitutes a factor affecting PED?
The more substitutes there are, the more elastic demand is, the fewer substitues, the more inelastic.
How is proportion of income a factor affecting price elasticity of demand?
The higher the proportion of income, the more price elastic
How is degree of necessity a factor affecting price elasticity of demand?
The more necessary a good, e.g. insulin, the more inelastic. The less necessary, the more elastic
How is time a factor affecting price elasticity of demand?
The longer after a price change, the more price elastic, because consumers have time to find substitutes that are cheaper
How is breadth of definition a factor affecting price elasticity of demand?
Specific things like quinoa will be very price elastic, and broad things like ‘grains’ or even ‘food’ will be very price inelastic, relatively.
How is spare/excess capacity a factor affecting price elasticity of supply?
Unused capacity, assuming variable factors are available, can be quickly used to respond to price changes in the market
How can inventory stocks affect PES?
If a producer has a stock of goods then it can respond to price increases more quickly by releasing the stocks
How is the ease of switching resources a factor affecting PES?
if a producer can quickly switch their resources towards creation of a product in demand, supply is elastic
How is time a factor affecting PES?
The longer the time, the more elastic the supply because suppliers can change to producing more/less of a good if they are given enough time
