Elasticities Flashcards
Elasticity def
a measure of the sensitivity of one variable to changes in another variable
PED def
Price elasticity of demand - a measure of the sensitivity of quantity demanded to a change in the price of a good or service
PED eqt
percentage change in quantity demanded / percentage change in price
percentage change eqt
N - O / O
remember PED
ignore ‘-‘ sign
if PED / S > 1
relatively price elastic - percentage change in quantity demanded > percentage change in price
if 0 < PED / S < 1
relatively price inelastic - percentage change in quantity demanded < percentage change in price
if PED / S= 1
unitary price elastic - percentage change in quantity demanded = percentage change in price
total revenue etq
total revenue = price x quantity
if PED / S= 0
perfectly inelastic - totally insensitive to price - price has no effect on demand
PED / S= 0 on graph
straight vertical line
0 < PED / S < 1 on graph
steep demand curve
PED / S > 1 on graph
shallow demand curve (more horizontal)
PED /S = 1 on graph
an actual demand CURVE / an straight 45 degree supply curve
if PED / S= infinite
perfectly price elastic - change in price = quantity demand will fall to 0
PED /S= infinity on graph
horizontal line
total revenue: price inelastic
price increases, TR increases
total revenue: price elastic
price increases, TR falls
influences on PED
- availability of substitutes
more substitutes = easier to switch to cheaper alternative = price elastic - necessity or luxury
necessity = no substitutes = price inelastic
luxury = not essential / needed = price elastic - relative share of goods / service in overall expenditure
cheap = not notice any small changes = price inelastic
more expensive = more price elastic - time period
price elasticity increases over time
b/c if price increase for a short period of time still price inelastic b/c habit and commitment to a certain pattern of consumption. If long run, consumers eventually find a cheaper alternative
Profit eat
total revenue - total costs
total revenue: unitary price elastic
price rises / falls = no change
direct tax def
a tax levied directly on an individual or organisation e.g. income tax
indirect tax def
a tax levied on expenditure on goods or services e.g. specific / ad valorem tax
specific tax def
a tax charged as a fixed amount per unit of good
ad valorem tax def
a tax charged as a percentage of the price of a good
indirect tax diagram
- labels: in context / y = price, x = quantity / D, S, S+tax
- inward shift in supply (tax per unit)
- contraction in demand / new equilibrium
- draw horizontal line where q2 hits S - tax levied on consumer is between p1 and p2 - whole area = tax revenue
- if price inelastic = more tax levied on consumer
- change in consumer / producer surplus
subsidy def
a grant given by the government to producers to encourage production of a good or service
subsidy diagram
- labels: in context / y = price, x = quantity / D, S, S+subsidy
- outward shift in supply (subsidy per unit)
- extension in demand / new equilibrium
- draw horizontal line where Q2 hits S - benefit of subsidy to consumer is between p1 and p2 - whole area = total cost of subsidy to government
- if price inelastic = more benefit of subsidy to consumer
- change in consumer / producer surplus
ad valorem diagram
tax per unit increases as quantity increase so is a slope
PES def
Price elasticity of supply - a measure of the sensitivity of quantity supplied to a change in the price of a good or service
PES eqt
percentage change in quantity supplied / percentage change in price
influences on PES (4)
- Spare capacity - they cannot this into use
- ease and cost of factor substitution - how easy resources cab be substituted between goods / if transferred easily
- stock of infused products and components - if already have stock room = if sudden excess of demand can respond quickly and sell
- time - elasticity increases over time - more time for suppliers to provide / respond
YED def
a measure of the sensitivity of quantity demanded to a change in consumer incomes
YED eqt
percentage change in quantity demanded / percentage change in consumer incomes
YED > 0 (pos)
normal - increase in income, increase in demand
YED < 0 (neg)
inferior - increase in income, fall in demand
YED > 1
luxury good - increase in income, increase in demand
0 < YED < 1
necessity - will be bought where there is a change of income or not
remember YED
not all consumers view the goods in the same way
YED = 1
unitary income elastic
XED def
a measure of the sensitivity of quantity demanded of a good/ service to a change in price of another good / service
XED > 0 (pos)
increase in price of good Y = increase in quantity demanded of good X = substitutes
XED < 0 (neg)
increase in price of good Y = decrease of quantity demanded of good X (complements)
0 < XED < +/-1
weak substitutes / complements
XED > -/+1
strong substitutes / complements
XED = 0
X and Y are unrelated
SOUP CAN
Substitutes
Positives
Complements
Negatives
