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Economics > Elasticity > Flashcards

Elasticity Flashcards

1
Q

What is PeD?

A

Measures responsiveness of demand to a change in price.

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2
Q

What is the formula for PeD?

A

PeD= %change of quantity demanded divided by %change in price

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3
Q

What factors influence the PeD?

A

Substitutes (number of them/ availability)
USP
Necessary
%of income spent on item
Time taken to respond- if prices stay high eventually people will respond
Habit forming
Breadth of definition
Cost of switching to substitute
Repeat purchase
Brand loyalty

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4
Q

What does elastic mean?

A

When the price changes the quantity changes by more then proportionately.

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5
Q

What does inelastic mean?

A

When the price changes, the demand changes by less than proportionately.

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6
Q

What does perfectly inelastic mean? And what is the coefficient?

A

Quantity doesn’t change regardless of any change in price.
Coefficient= 0
0 divided by anything which = 0

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7
Q

What does price inelastic mean? And what is the coefficient?

A

Quantity changes by less than price.
Coefficient= between 0 and -1

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8
Q

What does unitary (constant) elasticity mean? And what is the coefficient?

A

Changes are proportional.
Coefficient= -1
E.g 6 divided by -6= -1

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9
Q

What does price elastic mean? And what is the coefficient?

A

Quantity changes by more than the price.
Coefficient= -1 and below.

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10
Q

What does perfectly elastic mean? And what is the coefficient?

A

Price is fixed.
Coefficient= Infinity

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11
Q

Why is the coefficient always negative on a demand curve?

A

Because the quantity demanded is inverse to price.
If price increases, less is demanded.

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12
Q

What is income elasticity of demand? (YeD)

A

Measure of the responsiveness of demand to a change in income.

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13
Q

How do you calculate YeD?

A

%change of quantity demanded/ %change in income

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14
Q

What is a normal good and example?

A

Demand increases as consumer income rises.
E.g. Petrol, toothpaste

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15
Q

What are inferior goods and examples?

A

Increase in demand when consumer income falls. When people have less money they tend to buy more of these goods.
E.g. generic brands of food, public transport.

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16
Q

What is a luxury good and examples?

A

When income rises,so does demand.
E.g. designer goods, air travel.

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17
Q

What is the coefficient of a necessity?

A

Between 0 and 1
5/10=0.5

18
Q

What is the coefficient of a luxury good?

A

Above 1
Demand responds a lot to a change in income.
10/5=2

19
Q

What is the coefficient of an inferior good?

A

Below 0.
E.g. if income rises demand falls -5/10=-0.5
E.g. if income falls demand rises 10/-5=-2

20
Q

What is the relevance of income elasticity on the wider economy?

A
  • Recession, inferior goods demanded rise, shares are bought in inferior good firms.
  • Boom, luxury goods demanded rise, shares are bought in luxury good firms.
  • Firms can use YeD to decide where to locate. E.g if firms supply luxury items it is best to be located in a country where income is high.
21
Q

What is cross elasticity of demand? (XeD)

A

Measures the responsiveness of demand for one good, x to a change in price of another good y.

22
Q

What is the formula for XeD?

A

%change in QD of good x / %change in price of good y

23
Q

What is a substitute? Example?

A

Takes place of another.
E.g. Coke and Pepsi

24
Q

What is a complement? Examples?

A

Completes/ goes well with something.
E.g Cars and petrol

25
Q

What type of coefficient does a substitute have?

A

Positive

26
Q

What type of coefficient does a complement have?

A

Negative

27
Q

What type of number would a close substitute and a weak substitute have?

A

Close = positive and greater than 1
Weak= positive and smaller than 1

28
Q

What type of number would a close complement and a weak complement have?

A

Close= negative and smaller then -1
Weak= positive and greater then -1

29
Q

Why is the cross elasticity of demand calculated?

A
  • To explain the price of meal deals and drinks when out.
  • Useful for firms to price complements and substitutes.
30
Q

What is the price elasticity of supply (PeS)?

A

Measures the responsiveness of the quantity supplied to a change in price.

31
Q

How do you calculate the PeS?

A

%change in quantity supplied / %change in price

32
Q

What are the factors that influence PeS?

A
  • Factor substitution possibilities
  • Machinery
  • Suppliers of raw materials
  • Spare productive capacity available
  • Stocks (inventories) available to meet demand.
  • Time frame allowed, long run= elastic supply , short run= inelastic supply, Momentary period= fixed supply
  • Artificial limits on supply, e.g. quotas
33
Q

For an elastic supply curve what happens to the quantity supplied when the price changes?

A

Quantity supplied changes more than proportionately.

34
Q

For an inelastic supply curve what happens to the quantity supplied when the price changes?

A

Quantity supplied changes less than proportionately.

35
Q

What is the coefficient for a perfectly inelastic supply curve?

A

0
- Quantity must never change, 0 divided by 10=0

36
Q

What is the coefficient for a price- inelastic supply curve?

A

Between 0 and 1
- %change in quantity supplied is less than %change in price. 5/10=0.5

37
Q

What is the coefficient for a unit- elastic supply curve?

A

1
- When price rises supply changes proportionately. 12/12=1

38
Q

What is the coefficient of a price- elastic supply curve?

A

1 and above
- QD changes more than proportionately to a change in price. 15/10=1.5

39
Q

What is the coefficient of a perfect elastic supply curve?

A

Infinity
- Price doesn’t really change (fixed)

40
Q

How can you improve PeS?

A
  • Create spare capacity
  • Having flexible workers who can do a range of jobs
  • Using latest technology
  • Allowing inward migration of labour if there is a shortage of labour
  • Keeping sufficient stocks of raw materials.

Economics (4 decks)

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