Elasticity Flashcards
What does PED measure?
PED measures how consumers respond to price changes
Why can’t we use the demand curve slope to summarise consumer responses to price changes?
The problem is that it depends on the units in which quantity and price are measured
What is elasticity?
% change in one variable due to a % change in another variable
What is PED formula?
εD = dq/dp * p/q
What is the PED formula for large changes?
What’s the problem with the ped formula for large changes?
Depends on the choice of initial point (price rise or fall)
When does the problem disappear in large ped formula?
Problem only disappears if we look at small (marginal) changes only
What’s the more commonly used formula in economics for PED?
What is the number for inelastic demand
Between 0 and -1
What is unitary elastic?
PED = -1
What is PED for elastic?
Less than -1
What do PEDs help predict?
PEDs allow us to predict how expenditure on a good changes with price
Formula for total revenue or expenditure
TR = p * qₚ
Why do we write q(p)
To make explicit that that quantity is a function of price
Why is knowing how expenditure will change useful for firms and governments?
To know if taxes will reduce government tax receipts or if raising the price of a good will decrease firm revenue
How revenue changes depends on the price elasticity of demand. How does this change if demand is elastic/inelastic?
Total revenue (TR) increases if demand is inelastic and decreases is demand is elastic
What is income elasticity of demand formula?
YED = %change in quantity demanded/%change in income
dq/dY * Y/q
What is the YED of a normal good?
εᵧ is positive
What is YED of an inferior good?
εY < 0 negative
YED of a luxury good?
εY > 1
Formula for XED?
% Change in QD of good a/ %change in P of good B
What is the XED for substitutes?
XED > 0
What is XED for complements in demand?
XED < 0
What is PES formula?
%change in Quantity Supplied / %change in price
What is point elasticity?
dq(supplied)/dp * P/qS
Price elasticity of demand vary along what?
Varies along the demand curve and can be used to predict change in TR
