Elasticities Flashcards
What is the XED of complements
Always negative- close complements are greater than negative one, distant ones less than
⬆️ in price of good A leads to a ⬇️ in Qd of good B, so XED = +/- or -/+ and both = a negative
If close, then demand for A is more sensitive to changes in the price of B, but if distant then they can be consumed separately
What is the XED of a substitute
Always positive- closer substitutes are more than one, whilst more distant substitutes are less than one (because closer substitutes are more sensitive to a price change)
For subs: ⬆️ in p of good A leads to a ⬆️ in Qd of good B
Formula for price elasticity of supply (PES)
PES = %🔼Qs / %🔼P
Define price elasticity of supply
The responsiveness of a quantity supplied to a given change in price, is always positive
Formula of cross elasticity of demand (XED)
XED = %🔼Qd of good A/ %🔼P of good B
Define cross elasticity of demand XED
The responsiveness of qd for 1 product to a given change in the price of another
Formula of income elasticity of demand (YED)
YED = %🔼Qd/ %🔼Y
Define income elasticity of demand YED
The responsiveness of quantity demanded to a given change in income
Formula for price elasticity of demand
PED = %🔼Qd/ %🔼P
Define price elasticity of demand
The responsiveness of quantity demanded to a given change in price
Why is PED always negative
Because of the law of demand- price and quantity demanded have an inverse relationship
If PED>1
the %🔼Qd > %🔼P, so the consumers are quite responsive, so demand for the good is relatively elastic, e.g. PED= -2, perfectly=infinity
If PED<1
Small/big, so p inelastic, perfectly=0
If YED is positive…
Qd increases as real income rises, a normal good
If YED is negative…
Qd decreases as real income rises, inferior good
If positive YED and >1…
Qd increases by proportionally more than the rise in real income, a luxury good
If YED is positive and <1…
Qd increases by proportionately less than the rise in real income, necessity
Factors determining PED
Necessities inelastic Luxuries elastic Addictive/ brand loyalty inelastic Availability of subs Peak and off peak D
PED and tax rev
If firm selling gd that’s PED inelastic then most of burden passed on to consumer
When gd elastic, larger tax burden because D will fall and so lower total rev
PED and total rev
TR=p x q, if gd inelastic then ⬆️ TR (as firms will ⬆️p), if gd elastic and firm will ⬆️p and so ⬇️ TR
Factors determining YED
For luxury, ⬆️Y=⬆️D so YED>1
Poorer by necessities and inferior gds, so for these as income ⬆️, D⬇️ so YED<0
For normal gds D⬆️ as Y⬆️, so YED>0
When S is elastic
PES>1, if perfectly elastic = infinity (any QD can be met without changing p)
When S is inelastic
PES<1, if perfectly inelastic =0 (S is fixed, so cannot meet a change in D)
Factors determining PES
Time frame (SR=elastic) Stockpiles (⬆️ stockpiles=⬆️ elastic) Length of prod process (seasonal, v long= less responsive) Access/ availability of resources (easy access=elastic) Availability of prod surplus (if prod highly specialised= inelastic) (if lots of producers who can easily switch their market=elastic, but if prod process dissimilar to others then inelastic)
