Elasticity Flashcards
Define price elasticity of demand
How responsive quantity demand is to price changes
Define income elasticity
How responsive quantity is to changes in income
Define cross elasticity
How responsive the demand for good x due to changes in price for good y
What is the equation for price elasticity demand
PED (PERCENTAGE CHANGE IN QUANTITY DEMAND)
__________________________________________________________
PERCENTAGE CHANGE IN PRICE
Describe the difference between and in elastic and an elastic graph
Inelastic
- as price increases quantity decreases causing a graph that is steeper
- (price change is greater than quantity change inelastic)
Elastic
- as price decreases o the y axis quantity on the x axis increases. (Quantity change is greater than price change elastic
In both cases quantity is going left ie regardless of price change.
C
How to Calculate PED percentage change
Percentage change =
Change
—————. X 100
original
Differentiate between a slope and elasticity
Slope =
Focuses on abosulte change
Elasticity = percentage change
Finish the following:
IF PED equals 1 _________
Unitary elasticity
%change in demand = % change in price
Finish the following
If PED<1____
This is when quantity demand does not respond that much to price changes
Price elastic demand
Finish the following
If PED>1
Price elastic demand
PED responses quite a lot too price changes
What is the purpose of the midpoint method?
Finds the ped regardless of direction (ie positive or negative value)
What is the formula for the midpoint method?
PED = (Q2 - Q1)/ [(Q2+Q1)/2]
_________________________
(P2-P1)/[(P2+P1)/2]
Where q2 /p2 final quantity/final price
Where q1/ p1 is equal to initial quantity/initial price
What factors can affect PED
- necessity or luxury
If it is a necessity customer will b up it regardless of price and therefore inelastic - availability of substitutes
- proportion of income devoted to the product
Tends to elastic due to availability if substitutes
What does it mean if PED =0
The demand and price are perfectly inelastic
What is the formula to Calculate PEDD
Percentage change demand quantity / percentage price chnage
What is revenue
The rewards firms get for selling products
How do you calculate revenue
Price per unit X quantity
What should a business do if demand is inelastic
Raise prices
What should a business do if prices are elastic
Lower prices
Because quantity demanded is higher than prices
What is the relationship between elasticity of demand and income
Increases demand for luxury and normal goods
Decreases the demand for inferior goods
If normal good increase by ________ _________ takes place
10%
Consumers will by regardless of price
Eg haircuts water electricity
If a luxury good increases by more than 10%
The responsiveness would be less than one
Is YED for inferior goods positive or negative
Negative
As demand decreases as pice increases
What is price elasticity of supply
Measures how responsive supply is to a change in price
Describe supply price inelastic supply graphs
Steep graph
As price increased demand increased but not very much
This can be due to the firm only receiving the amount that would be enough to produce good
Describe price elastic graph
Shallow graph
As price increased by a small amount quantity significantly increased.
What is the equation for price elastic supply
= % change quantity supply/ %change in price
If PES = 1 ……
Unitary elasticity
%change in supply is equal to percentage change in price
If PES<1 ……
Price inelastic
There minimal change to the graph of QS
Steeper graph
IF PES>1……..
QS responds a lot to price change
Price elastic
What are some determining factor of PES
Time period
-for a short period of time a firm may find i difficult to respond to price changes due to the sudden need to expand production
Inventory stock
Availability of raw materials
- if firm is heavily reliant on raw or scarce materials
What does it mean if PES = 0
Perfect price inelasticity
