elasticity Flashcards
what is elasticity
measures the responsiveness of demand
what is PED
price elasticity of demand
what does PED measure
the extent to which the quantity of a product of demand is affected by the price
what is the formula for PED
percentage change in quantity demanded / percentage change in price
what does it mean if the coefficient of PED is more than 1
it is elastic
Change in demand is more than the change in price
what does it mean if the coefficient of PED is less than 1
inelastic
Change in demand is less than the change in price
what is unitary elasticity
coefficient of 1
Change in demand = change in price
what is perfectly inelastic
coefficient of 0
what does it mean if demand is price inelastic
an increase in price leads to a smaller change into the quantity demanded so revenue will INCREASE
what does it mean if demand is price elastic
an increase in price leads to a bigger change in quantity demanded so revenue will FALL
why is PED important
- PED helps businesses to examine the likely impact of a change in price
- If PED > 1 (price elastic) then a change in price will cause a larger change in demand
- This means overall revenues would increase if the price was reduced
- But overall revenues would decrease if the price was increased
- If PED < 1 (price inelastic) then the opposite would happen
factors affecting PED
- brand strength
- necessity
- habit
- availability of substitutes
- time
what does YED stand for
Income elasticity of demand
what is YED
measures the extent to which the quantity of a product demanded is affected by a change in income
formula
% change in quantity demanded
/ %change in income
what coefficient of income elastic goods
greater than 1
demand changes by more significant amount with income change
what coefficient of income inelastic goods
less than 1, greater than 0
demand relatively unresponsive to consumer income
what are normal goods
necessities and luxuries
what is the main factor influencing income elasticity of demand
type of product
what happens to normal goods when incomes increase
demands also increase
what happens to normal goods when incomes decrease
demand decreases
what happens to inferior gods when income rises
demand decreases
what happens to inferior gods when income falls
demand rises
use of YED
- provide useful insights for decision making
- firms tend to like to have products with inelastic demand
