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Economics > Elasticity > Flashcards

Elasticity Flashcards

1
Q

Define price elasticity of demand

A

How responsive quantity demand is to price changes

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2
Q

Define income elasticity

A

How responsive quantity is to changes in income

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3
Q

Define cross elasticity

A

How responsive the demand for good x due to changes in price for good y

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4
Q

What is the equation for price elasticity demand

A

PED (PERCENTAGE CHANGE IN QUANTITY DEMAND)
__________________________________________________________
PERCENTAGE CHANGE IN PRICE

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5
Q

Describe the difference between and in elastic and an elastic graph

A

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

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6
Q

How to Calculate PED percentage change

A

Percentage change =
Change
—————. X 100
original

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7
Q

Differentiate between a slope and elasticity

A

Slope =
Focuses on abosulte change
Elasticity = percentage change

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8
Q

Finish the following:
IF PED equals 1 _________

A

Unitary elasticity
%change in demand = % change in price

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9
Q

Finish the following
If PED<1____

A

This is when quantity demand does not respond that much to price changes
Price elastic demand

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10
Q

Finish the following
If PED>1

A

Price elastic demand
PED responses quite a lot too price changes

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11
Q

What is the purpose of the midpoint method?

A

Finds the ped regardless of direction (ie positive or negative value)

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12
Q

What is the formula for the midpoint method?

A

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

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13
Q

What factors can affect PED

A
  • 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
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14
Q

What does it mean if PED =0

A

The demand and price are perfectly inelastic

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15
Q

What is the formula to Calculate PEDD

A

Percentage change demand quantity / percentage price chnage

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16
Q

What is revenue

A

The rewards firms get for selling products

17
Q

How do you calculate revenue

A

Price per unit X quantity

18
Q

What should a business do if demand is inelastic

A

Raise prices

19
Q

What should a business do if prices are elastic

A

Lower prices

Because quantity demanded is higher than prices

20
Q

What is the relationship between elasticity of demand and income

A

Increases demand for luxury and normal goods
Decreases the demand for inferior goods

21
Q

If normal good increase by ________ _________ takes place

A

10%
Consumers will by regardless of price
Eg haircuts water electricity

22
Q

If a luxury good increases by more than 10%

A

The responsiveness would be less than one

23
Q

Is YED for inferior goods positive or negative

A

Negative

As demand decreases as pice increases

24
Q

What is price elasticity of supply

A

Measures how responsive supply is to a change in price

25
Q

Describe supply price inelastic supply graphs

A

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

26
Q

Describe price elastic graph

A

Shallow graph
As price increased by a small amount quantity significantly increased.

27
Q

What is the equation for price elastic supply

A

= % change quantity supply/ %change in price

28
Q

If PES = 1 ……

A

Unitary elasticity
%change in supply is equal to percentage change in price

29
Q

If PES<1 ……

A

Price inelastic
There minimal change to the graph of QS
Steeper graph

30
Q

IF PES>1……..

A

QS responds a lot to price change
Price elastic

31
Q

What are some determining factor of PES

A

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

32
Q

What does it mean if PES = 0

A

Perfect price inelasticity

Economics (11 decks)

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