Elasticity Flashcards
What is elasticity?
Elasticity is the measure of how sensitive the demand for a product or service is to a change in price.
What is the formula for calculating PED?
%change in q demanded / %change in price
What is the difference between elastic and inelastic demand?
Elastic demand means that the demand for a product changes significantly with a change in price (PED > 1), while inelastic demand means that the demand for a product changes only a little with a change in price (PED between 0 and 1).
What are the factors that affect PED?
(Time Should Never Come Back To Friends)
- Time
- necessity
- substitutes
- competition
- branding
- the proportion of income spent
- frequency of purchase.
How do changes in price affect revenue?
Changes in price have two effects on revenue: an increase in revenue per unit sold and a decrease in the total units sold.
What are the types of goods based on YED? How do we determine what goods +YED and -YED consist of?
Inferior goods, normal goods, and luxury goods.
-YED = inferior goods
+YED = normal goods (luxury or necessity)
What is the formula for calculating PES?
%change in quantity supplied / %change in price
What is the unitary price elasticity of supply?
Unitary price elasticity of supply is when the change in price is proportionate to the change in quantity supplied (usually represented as exactly 1).
What are the factors that determine the PES?
The flexibility of resources/factors of production
storage/stocks of the product
spare capacity of the business
the time period under consideration.
What does a PED value of less than 1 mean?
A PED value of less than 1 means that the demand is inelastic.
What is PES?
The responsiveness of supply in response to a change in price
What is PED?
The responsiveness of demand in response to a change in price
Evaluation points for PED?
When demand is inelastic, the price rise will have less impact on demand and boosts revenue and profit in the long term for businesses
PED is only an estimate and actual demand may not be the same as the calculations suggest
There may be other factors affecting consumer spending and business confidence
PED could be a useful tool in helping governments decide but it may be better if other analyses of potential outcomes are used alongside it.
What is YED?
The responsiveness of demand to changes in consumer income
Definition of a normal good
a product that increases in demand when income increases, and decreases in demand when income decreases
