Elasticity Flashcards
What is Price Elasticity of Demand (PED)?
Price Elasticity of Demand (PED) measures the responsiveness of the quantity demanded of a good or service to a change in its price.
What is the formula to calculate PED?
PED = % Change in Quantity Demanded / % Change in Price
How do you calculate percentage change in quantity demanded?
Percentage change in quantity demanded = (New Quantity - Original Quantity) / Original Quantity × 100
How do you calculate percentage change in price?
Percentage change in price = (New Price - Original Price) / Original Price × 100
What characterizes Price Elastic Demand?
Price Elastic Demand (PED > 1): Demand is responsive to price changes. The demand curve is flatter.
What characterizes Price Inelastic Demand?
Price Inelastic Demand (PED < 1): Demand is less responsive to price changes. The demand curve is steeper.
What does Perfect Price Inelasticity (PED = 0) mean?
Quantity demanded does not change regardless of the price change.
Example: Life-saving drugs.
What does Price Inelasticity (0 < PED < 1) indicate?
Demand is not highly responsive to price changes. A price increase results in a smaller decrease in quantity demanded.
What is Unitary Price Elasticity (PED = 1)?
The percentage change in quantity demanded is equal to the percentage change in price.
What does Price Elasticity (PED > 1) indicate?
Demand is highly responsive to price changes. A price increase results in a larger decrease in quantity demanded.
What does Perfect Price Elasticity (PED = ∞) mean?
Any change in price results in an infinite change in quantity demanded. The demand curve is horizontal.
What factors influence PED?
Substitutes, Degree of Necessity, Percentage of Income Spent, and Time.
What is Total Revenue (TR)?
Total Revenue (TR) = Price × Quantity Sold
What happens to total revenue with Elastic Demand (PED > 1)?
A price increase leads to a decrease in total revenue; a price decrease leads to an increase in total revenue.
What happens to total revenue with Inelastic Demand (PED < 1)?
A price increase leads to an increase in total revenue; a price decrease leads to a decrease in total revenue.
What is Price Elasticity of Supply (PES)?
Price Elasticity of Supply (PES) measures the responsiveness of the quantity supplied to a change in the price of a good or service.
What is the formula to calculate PES?
PES = % Change in Quantity Supplied / % Change in Price
What characterizes Price Elastic Supply?
Price Elastic Supply (PES > 1): Supply is highly responsive to price changes. The supply curve is flatter.
What characterizes Price Inelastic Supply?
Price Inelastic Supply (PES < 1): Supply is less responsive to price changes. The supply curve is steeper.
What does Perfect Price Inelasticity (PES = 0) mean?
Quantity supplied does not change regardless of price.
Example: Land.
What does Price Inelasticity (0 < PES < 1) indicate?
Supply does not increase significantly with price increases.
What is Unitary Price Elasticity (PES = 1)?
The percentage change in quantity supplied is equal to the percentage change in price.
What does Price Elasticity (PES > 1) indicate?
Supply is highly responsive to price changes. A price increase leads to a larger increase in quantity supplied.
What does Perfect Price Elasticity (PES = ∞) mean?
Any change in price causes an infinite change in quantity supplied. The supply curve is horizontal.
What factors influence PES?
Factors of Production, Availability of Stocks, Spare Capacity, and Time.
What is Income Elasticity of Demand (YED)?
Income Elasticity of Demand (YED) measures the responsiveness of the quantity demanded of a good or service to a change in consumer income.
What is the formula to calculate YED?
YED = % Change in Quantity Demanded / % Change in Income
What does Luxury Goods (YED > 1) indicate?
Income elastic goods, where demand increases more than proportionately as income rises.
Example: Expensive cars.
What are Normal Goods (0 < YED < 1)?
Demand increases with income, but at a proportionally smaller rate.
Example: Clothing.
What are Inferior Goods (YED < 0)?
Demand decreases as income increases.
Example: Generic brands.
What is the significance of price and income elasticities of demand to businesses?
Imposition of Indirect Taxes and Subsidies can affect demand based on elasticity.
