Elasticity Flashcards
What is elasticity
Elasticity measures the responsiveness of demand to a change in a relevant variable.
What is price elasticity of demand
PED measures the extent to which the quantity of a product demanded is affected by a change in price
How is PED calculated
%change in Qd/ %change in price
If the PED of a product is more than 1 this means…
The product is price elastic, change in demand is more than the change in price.
If the PED of a product is LESS than 1 this means…
Demand is price inelastic, change in demand is less than the change in price.
If the PED of a product is exactly 1 this means…
Demand is unitary, change in demand=change in price
What is income elasticity of demand
Measures the extent to which the quantity of a product is affected by a change in income.
What is a luxury good
A good that, as income grows, proportionally more is spent on luxuries. YED more than 1.
What is a necessity
As income grows, proportionally less is spent on necessities. YED is less than 1 but more then 0.
What is a normal good
A product with a positive YED. WE buy more of these if income rises.
What is a inferior good
A product with a negative YED, we buy fewer of these if real income rises.
List some limitations of using elasticitities
Can be difficult to get reliable data on how demand changes in relation to price, Other factors affect demand, Many markets subject to rapid technological change
