Elasticity Flashcards
What is elasticity?
A measure of the sensitivity of one variable to changes in another variable.
PED Calculation
PED = %ΔQd/%ΔP
PED’S Will always have
a negative coefficient
PED’s will always be a
estimate
Why knowledge of PED is important to firms?
Firms total revenue calculation. P x Qd. Price falls - Qd rises Price rise - Qd falls
Demand relatively price elastic meaning
increase in price - rise in TR fall in price - fall in TR
Determinants of PED
S - Substitutes P - price of a good L - extent luxury/necessity good A - addictiveness T - time short term - more price inelastic long term - price elastic
What type of demand elasticity is this curve?
relatively elastic demand >1
What type of demand elasticity curve is this?
Relatively inelastic demand <1
What type of elasticity of demand is this curve?
Perfectly inelastic
What is this demand elasticity curve?
Perfectly inelastic
What type of elasticity of demand is this?
Unitary elastic demand
What is YED?
A measure of the sensitivity of demand to a change in consumer incomes.
YED Calculation
YED = %ΔQd / %ΔY
YED - Normal necessity goods
Positive coefficient less than 1.
As income increases there is a proportionately smaller increase in quantity demanded.
Normal goods - luxuries and YED
Positive coefficient greater than 1.
As income increases proportionately greater increase in quantity demanded.
YED + Inferior goods
Negative coefficient
As income rises, there will be a decrease in quantity demanded.
Evaluation YED
- YED calculations are based on historical data
- YED calculations are estimates
- Consumers different preferences. Varied perception on good classification.
- Ceteris Paribus
How to distinguish between inelastic and elastic YED
Inelastic - ^^/vv
Elastic - ^v
XED calculation
XED = %ΔQd Good A /%ΔP Good B
XED Coefficients classification
Minus means that the goods are complements
Plus means that the goods are substitutes
Higher = stronger.
If PED >1
P = increase
demand is relatively price elastic.
Therefore, an increase in price leads to a decrease in business revenue.
If PED <1
P = increase
demand is relatively price inelastic.
Therefore, a decrease in price leads to an increase in business revenue.
if PED >1
P - decrease
demand is relatively price elastic.
Therefore, a decrease in price leads to an increase in business revenue.
If PED <1
P = decrease
demand is relatively price inelastic.
Therefore, a decrease in price leads to a decrease in business revenue.
INELASTIC ELASTICITY PROPERTIES
PERFECTLY ELASTIC
infinity
%Δ Qd infinite
INELASTIC ELASTICITY PROPERTIES
Relatively elastic
Greater than -1.
%ΔQd greater than %ΔP
INELASTIC ELASTICITY PROPERTIES
UNIT ELASTICITY
-1
%ΔQd = %ΔP
INELASTIC ELASTICITY PROPERTIES
RELATIVELY INELASTIC
Less than -1
%ΔQd/%ΔP
INELASTIC ELASTICITY PROPERTIES
PERFECTLY INELASTIC
0
NO PERCENTAGE CHANGE
What type of elasticity of supply curve is this?
Inelastic supply
What type of elasticity of supply is this?
Relatively elastic supply
What type of elasticity of supply is this?
Price relatively inelastic
What type of supply elasticity curve is this?
Perfectly elastic
What type of supply elasticity curve is this?
Unitary elastic
XED DEFINE
a measure of the sensitivity of-of quantity demanded of a good to a change in the price of another good.
PES define
Measures the responsiveness of quantity supplied of a good to a change in price of that good.
PES CALCULATION
PES = %ΔQs / %ΔP
If PES = 1 PES =
UNITARY ELASTIC
IF PES = >1, PES =
PRICE ELASTIC SUPPLY
IF PES = <1, PES=
PRICE INELASTIC SUPPLY
Determinants of PES
- Extent of current, space capacity in the firm/market.
- The wase with which firms can build/reduce stocks of goods.
- For an individual firm - availability of substitutes in supply.
- Time
