Elasticity Flashcards
What is the meaning of elasticity?
Responsiveness of a change in one variable to a change in another variable.
Equation of PED?
% change in QD / % change in P
Factors affecting PED?
- substitutability
- percentage of income
- necessities or luxuries
- time
- width of the market definition (e.g demand for coca-cola vs demand fr soft drinks)
What is income elasticity of demand?
It measures how demand responds to a change in income.
When is YED positive and negative?
Income elasticity of demand is always negative for an inferior good and positive for a normal good.
What can normal goods be divided into?
Superior goods or luxuries, and basic goods
What are the PEDs for basic/superior goods?
Basic 0-1
Superior/luxury 1+
What is cross elasticity of demand?
It measures how demand for one good responds to changes in the price of another good. It indicates the nature of the demand relationship between the goods.
What are the relationships?
Complementary = Negative
Substitutes = Positive
No relationship = 0
What is PES?
Measures how the supply of a good responds to a change in a good’s price?
PES Formula?
% Change in Quantity Supplied / % Change in Price.
What factors affect PES?
- length of production period (longer = more in)
- availability of spare capacity (higher = more e)
- ease of accumulating stocks (more = more e )
- ease of switching between alternative methods of production (higher flexib. = more e
- no. of firms in market, ease of entry into market (more firms = more e)
- time (more time = more e)
- long-run supply (longer = more e)
Why is demand curve downward sloping?
Why is supply curve upward sloping?
How would taxes and subsidies affect supply?
