Elasticity Flashcards
What is elasticity
The extent to which quantity demanded (or supplied) will change due to another factor
What are the 4 types of elasticity
PeD (Price Elasticity of Demand)
PeS(Price elasticity of Supply)
XeD(Cross Elasticity of Demand)
Yed(Income Elasticity of Demand)
What does PeD measure
The amount to which quantity demanded changes due to a change in price
What does PeS measure
The amount to which quantity demanded changes due to a change in price
What does YeD measure
The amount to which quantity demanded will change due to a change in the average level of RDI in the economy
What does XeD measure
The extent to which quantity demanded changes due to the change in price of another product
How is PeD calculated
%ΔDemand / %ΔPrice
! What does %Δ mean
Percentage change in
When is a good considered elastic
When |Elasticity| > 1
What is the normal result from a PeD calculation
A negative number because people are likely to stop buying if price increases
What is the equation for YeD
%ΔDemand / %ΔRDI
What rule can be applied for all elasticity formulae
Q / T
What does a low YeD tell us about a good
It is a necessity
What is the equation for XeD
%Δ Quantity demanded of good 1 / %Δ price of good 2
If XeD is positive, what would that suggest about the relationship between the 2 goods
They are substitutes
If XeD is negative, what would that suggest about the relationship between the 2 goods
They are complimetary
What is the equation for PeS
%ΔSupply / %ΔPrice
What is the largest factor that affects PeD
The number of close substitutes available
However habit forming products and branded goods also have a low PeD
Which factor has the largest effect on PeS
Time as it allows for the markets to adpat
Which type of elasticity is determined purely based on whether or not the good is a luxury
YeD
What would a perfectly price elastic demand curve look like
A horizontal flat line
