Elasticity Flashcards
elasticity
responsiveness - what will the change be
formula for XED
%change in QD of good (A) / %change in P of good (B)
What influences XED?
Substitutes (+ sign)
complements (- sign)
unrelated (0)
Importance of XED
useful as it can help determine whether or not it is a good move to increase or decrease selling prices, or to substitute one produce for another to increase revenue
If your XED is low…
…you have far more freedom to change your prices. Businesses will relish a low XED, may allow a monopoly to develop
If XED is very high (+5)
Putting up prices is going to leak an awful lot of customers
Cross elasticity of Demand (XED)
Responsiveness of quantity demanded of one product to changes in the price of another good
XED value Below -1 Between -1 and 0 0 Between +0 and +1 Above +1
Strong complement Weak complement No relationship between two goods Weak substitute Strong substitute
Formula for PES
%change in QS / %change in P
Importance of PES
Useful for a firm to know quickly, and effectively it can respond to changing market conditions, especially to price changes
Factors affecting PES
Production lag Substitutability of FoPs Spare capacity Stocks Time period
If the PES is less than one, the good is…
Inelastic- the price has gone up (e.g. by 10%) supply has risen a little (5%)
If the PES is greater than one, the good is…
Highly elastic- as the price goes up a great deal, more produce is released on to the market
Price elasticity of supply (PES)
Responsiveness of quantity supplied of a product to changes in the price of that product
Complements
Products that are bought alongside another product
E.g. milk for tea and coffee
Complements (XED) what would the sign be?
When XED is negative, the goods are complementary products
Substitutes (XED) what would the sign be?
When XED positive, the related goods are substitutes
The bigger the number the closer the substitute
Formula for YED
%change in QD / %change in (Y)
Importance of YED
Useful for businesses to know as this will help them decide what goods to produce and how a change in overall income in the economy affects the QD for their product
Income elasticity of demand (YED)
Responsiveness of QD for products to changes in the levels of disposable income in an economy
1) When income rises, demand for inferior goods…
2) When income falls, demand for inferior goods…
1) falls
2) rise
YED value Below -1 Between -1 and 0 0 Between 0 and 1 Above 1
- Income Elastic inferior good
- Income Inelastic inferior good
- No relationship between income and QD
- Income Inelastic normal good (necessity)
- Income Elastic normal good (Luxury)
High YED (+3)
QD varies considerably with income changes
Elastic normal good (luxury)
Low YED (+0.3)
Inelastic normal good (necessity)
As income increases QD decreases but proportionally less
Negative YED (-1)
Elastic Inferior good, RDI +, QD decreases
Factors of YED
1) Necessity
2) Luxury
For PED and PES if less than 1 it is…
…price inelastic
For PED and PES if greater than 1 it is…
…price elastic
For PED and PES if infinite it is…
…perfectly price elastic
For PED and PES if 0 it is…
…perfectly price inelastic
Formula for PED
%change in QD / %change in P
Importance of PED
Important that businesses know this, whether changing the prices will affect revenue negatively/positively
Factors affecting PED
- Substitutability
- Time
- Type of good (addiction, e.g. cigarettes, more price inelastic due to addiction) (unnecessary goods, e.g. kitchen roll, more price elastic)
If price elastic for PED what would the demand curve look like on a graph?
flat curve
If price inelastic for PED what would the demand curve look like on a graph?
steep/vertical curve
Price elasticity of Demand (PED)
Responsiveness of QD to the changes in price
What relationship does a normal good have with income and QD?
Positive relationship
Income increases demand will increase, if income decreases demand will decrease
What relationship does inferior goods have with income and QD?
Inverse relationship
Income increases demand for inferior goods will decrease
How to remember XED whether it’s a substitute or complementary?
Party (positive)
Season (substitute)
Near (negative)
Christmas (complementary)
