Elasticity Flashcards
Define Price Elasticity of Demand
The responsiveness of the quantity demanded to a change in price
Define inelastic demand
where demand has little response to changes in price. Steep curve
Define elastic demand
Where changes in price result in large changes in demand. Flatter curve
Perfectly Elastic Demand
demand where PED=0, a change in price has no change in quantity demanded.
Relatively inelastic PED
PED between 0 and -1. %Change in demand smaller than %Change in price. Small change in demand when price changes.
Unitary Elastic PED
PED is equal to -1. % Change in demand is exactly equal to % change in supply.
Relatively inelastic PED
PED between -1 and negative infinity. % Change in demand is more than the % change in price
Factors Affecting PED
SPLAT. Substitutes, Proportion of income, Luxury/Necessity, Addiction/habit, Time period following price change.
Total Revenue=
Price x Quantity.
PED Equation
(Δ% in quantity demanded)/(Δ% in price)
PES Definition
A measure of the responsiveness of supply to a change in price (always positive).
PES Equation
(%Δ Quantity Supplied)/(%Δ Price)
Inelastic Supply
Supply doesn’t respond much to changes in price.
Elastic Supply
Changes in price result in large changes in supply.
Perfectly Inelastic Supply
PES=0. No response to a change in price. Vertical Supply Curve.
Inelastic Supply
PES between 0 and 1. Less than proportionate increase in supply to a change in price. Steep curve.
Unitary Supply
PES=1. Percentage change in supply= percentage change in price.
Elastic Supply
PES between 1 and +infinity. More than proportionate change in supply to change in price.
Perfectly elastic supply
Producers will supply any amount at a given price. Horizontal supply curve.
Factors affecting PES
TRIBES. Time, Resources available, inventory levels (can goods be stored?- perishability), barriers to entry, ease of factor substitution, spare capacity.
Income elasticity of supply
The responsiveness of demand to a change in income.
YED equation
(%Δ in quantity demanded)/(%Δ in consumer income)
Normal Goods
When income increases, demand rises. YED >0
Inferior Goods
When income increases, demand falls, YED<0
Luxury Goods
PED greater than one. Income elastic.
Necessities
YED less than one. Income inelastic.
