Elasticity Flashcards
What must the midpoint value be to be elastic?
Greater than 1
What must the midpoint value be to be inelastic?
Less than 1
What must the midpoint value be to be unitary?
1 (45°/directly proportionate)
How is elasticity of demand measured?
Ed = quantity change/average x price average/change
Factors affecting price elasticity of demand
Substitute availability, luxuries over necessities, time, proportion of income spent
How does substitute availability affect elasticity?
The greater number of substitutes, the greater the elasticity
Who benefits from price inelasticity?
Producers and government (if taxed)
Who benefits from price elasticity?
Consumers
What makes a product price elastic?
Demand highly sensitive to small price changes
What are the three ways of measuring elasticity?
Midpoint method, total revenue, income elasticity
Midpoint method
Qd change/Q average x P average/P change
Total revenue
TR = PxQ
Direct relationship is inelastic, inverse relationship is elastic
Income elasticity
Ey = % Q change/% Y change
Price Elasticity of Demand
Responsiveness of quantity demanded to a change in price
Inferior good income elasticity
Negative, less than 0
Normal good income elasticity
Positive, greater than 1
How does availability of substitutes affect PED?
Easy to switch if price changes, options
How does the necessity or luxury status of a good affect PED?
If we need it the price is inelastic, if it’s a luxury the price is elastic, addictions considered necessities by users → price inelastic
How does proportion of income spent affect PED?
Expensive goods are elastic due to using high proportion of consumer’s income, e.g. 50% increase is greater for $1000 TV than $1 chocolate bar
How does time affect PED?
Time to respond to price change is elastic, demand for commodities is inelastic because consumers don’t have time to adjust their consumption/find subs
Price elasticity of supply
Responsiveness of quantity supplied to a price change
Determinants of price elasticity of supply
Time, nature of industry
How does time affect PES?
If producer responds quickly to change price is elastic, difficult to increase supply on short notice → supply tends to be inelastic, time increases supply elasticity,
How does the nature of an industry affect PES?
Agriculture is inelastic because they can’t respond to demand quickly, manufactured goods are elastic because they can easily expand output
