Elasticity Flashcards
What is elasticity
It’s a measure of how much the quantity demand will be affected by a change in price, income or the price of another good
What is price elasticity of demand
The proportionate responsiveness of quantity demanded to a change in price
how do you calculate price elasticity of demand
% change in quantity demanded / % change in price
What are the determinants of price elasticity of demand (SNAP)
Substitutes = the more substitutes the more elastic as if you up price they go to a substitutes
Necessity or luxury = necessities tend to be more price inelastic. Luxuries tend to be mor price elastic
Addictive nature= if something is addictive then its more inelastic as its harder to stop consuming it. The same can be said for switching between products such as phone contracts
Proportion of income = the greater the proportion of income the more elastic the demand (if the price of chocolate goes up we are still likely to buy it )
Short run and long run = in long run things become more price elastic as substitutes emerge or people learn to do without things
What happens to total revenue when price increases
If ped is elastic then total revenue decreases
If ped is inelastic then total revenue increases
How do you calculate total revenue
Price x quantity sold
What is direct tax
A tax on you income
What is indirect tax
A tax on expenditure/ spending
What is income elasticity of demand (YED)
The proportionate responsiveness of quantity demanded to changes in consumers’ incomes
What is the formally to calculate YED
% change in quantity demanded / % change in consumers’ income
What is a normal good
A good for which as income increases QD will also increase and vice versa
What is the YED of a normal good
A positive number
What is an inferior good
A good for which as income increases QD will fall and vice versa
What is the YED for an inferior good
A negative number
What is cross elasticity of demand
The proportionate responsiveness of quantity demanded of one good (good A) to a change in the price of another good (good B)
What is the formula to calculate cross elasticity of demand
% change in quantity demanded of good a / % change in price of good b
If cross elasticity of demand is positive what does the mean
The goods are substitutes for each other
This is because as the price of one good increase then the quantity demanded for the other good also increases as they swap to the substitute item. (The opposite happens if the price falls)
If cross elasticity of demand is negative what does the mean
The goods will be complements
as an increase is price of one good leads to a fall in quantity demanded of another good as they stop buying both of them
( if P falls then QD increases )
What is price elasticity of supply (PES)
The responsiveness of supply to a change in price
What is the formula to calculate PES
% change in quantity supplied / % change in price
Why PES always positive
Because an increase in price is an incentive for suppliers to supply so they can make more profit
What are the 4 things that determine PES
- how flexible the production process is
- how much spare capacity there is
- how much stock there is
- the time period
How does flexible determine PES
If product can be easily switched to produce something else then is more price elastic if it can’t be easily switched then it is more price inelastic
How does spare capacity determine PES
If there’s lots of spare capacity then its more price elastic
If there’s no spare capacity then the firm is operating at full capacity so increasing output is more difficult to PES is more inelastic
