Elasticity Flashcards
What is PeD?
Measures responsiveness of demand to a change in price.
What is the formula for PeD?
PeD= %change of quantity demanded divided by %change in price
What factors influence the PeD?
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
What does elastic mean?
When the price changes the quantity changes by more then proportionately.
What does inelastic mean?
When the price changes, the demand changes by less than proportionately.
What does perfectly inelastic mean? And what is the coefficient?
Quantity doesn’t change regardless of any change in price.
Coefficient= 0
0 divided by anything which = 0
What does price inelastic mean? And what is the coefficient?
Quantity changes by less than price.
Coefficient= between 0 and -1
What does unitary (constant) elasticity mean? And what is the coefficient?
Changes are proportional.
Coefficient= -1
E.g 6 divided by -6= -1
What does price elastic mean? And what is the coefficient?
Quantity changes by more than the price.
Coefficient= -1 and below.
What does perfectly elastic mean? And what is the coefficient?
Price is fixed.
Coefficient= Infinity
Why is the coefficient always negative on a demand curve?
Because the quantity demanded is inverse to price.
If price increases, less is demanded.
What is income elasticity of demand? (YeD)
Measure of the responsiveness of demand to a change in income.
How do you calculate YeD?
%change of quantity demanded/ %change in income
What is a normal good and example?
Demand increases as consumer income rises.
E.g. Petrol, toothpaste
What are inferior goods and examples?
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.
What is a luxury good and examples?
When income rises,so does demand.
E.g. designer goods, air travel.
What is the coefficient of a necessity?
Between 0 and 1
5/10=0.5
What is the coefficient of a luxury good?
Above 1
Demand responds a lot to a change in income.
10/5=2
What is the coefficient of an inferior good?
Below 0.
E.g. if income rises demand falls -5/10=-0.5
E.g. if income falls demand rises 10/-5=-2
What is the relevance of income elasticity on the wider economy?
- 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.
What is cross elasticity of demand? (XeD)
Measures the responsiveness of demand for one good, x to a change in price of another good y.
What is the formula for XeD?
%change in QD of good x / %change in price of good y
What is a substitute? Example?
Takes place of another.
E.g. Coke and Pepsi
What is a complement? Examples?
Completes/ goes well with something.
E.g Cars and petrol
