Elasticity Flashcards
What is price elasticity? Equation?
The responsiveness of demand to a change in the price level
% change in Q.D/ & change in price
If PED is above 1, is it elastic or inelastic?
Elastic
If PED is below 1, is it elastic or inelastic?
Inelastic
If PED is 0?
Perfectly inelastic
If PED is infinity?
Perfectly elastic
If PED is 1?
Unitary elastic
What is low price elasticity?
Inelastic
What is high price elasticity?
Elastic
What factors determine PED? (2)
Price of substitutes
Time
If there are a lot of substitutes, is PED elastic or inelastic?
Elastic
What is the incidence of tax?
The proportion of tax that is passed on to the consumer
If PED is elastic, is the incidence of tax high or low?
Low
If PED is elastic, is the total revenue high or low?
Low
If a tax is imposed on a price elastic product, what would happen to employment? Why?
Employment would fall, due to the big fall in quantity
What is income elasticity of demand? Equation?
The proportion to which demand changes when there is a change in income
% change in quantity/ % change in income
What is a normal good?
Goods or services that will see an increase in demand when income rises
What is an inferior good?
Goods or services that will see a decrease in demand when income rises
If YED is positive, is the good normal or inferior?
Normal
If YED is negative, is the good normal or inferior?
Inferior
What is cross price elasticity of demand? Equation?
The proportion to which demand of one product changes when there is a change in the price of another product
% change in quantity of good a/ % change in price of good b
What is a substitute?
Goods that can be used as alternatives to another good
What is a complement?
Goods that are consumed with another good
If XED is positive, is it a substitute or a complement?
Substitute
If XED is negative, is it a substitute or a complement?
Complement
What is price elasticity of supply? Equation?
The responsiveness of supply to a change in price
% change in supply/ % change in price
What is a commodity?
A good that is traded, but usually refers to raw materials
What factors affect the price elasticity of supply? (3)
Time
Availability of stock
Availability of spare capacity
