Elasticity Flashcards
What does PED mean
Responsiveness of demand to a change in price
Perfectly inelastic
(Straight line) = 0
Price changes , the quantity demanded will stay the same
Inelastic demand
(High gradient slope)
Unit elastic demand
1 quantity and price change at the same rate
Elastic demand
(Low gradient) >1
Quantity demanded changes at a greater rate than price
Perfectly elastic
- infinity
Any quantity demand at a given price
Factors determining elasticity of demand. Substitutes
More substitutes available = more elastic demand
Factors determining elasticity of demand. Habit forming goods
Goods such as cigarettes are unusually more inelastic
Factors determining elasticity of demand. Luxury/ necessity
Necessities= inelastic demand Luxury = elastic demand
Factors determining elasticity of demand. % of income spent
Smaller proportion of income spent purchasing= elastic
Factors determining elasticity of demand. Time period
demand is more elastic in the long run
If there’s a tax introduced what does that mean for price
The price of the tax will be passed onto consumers for inelastic goods
Normal goods definition
As income rises demand increases
Inferior good Definition
As income rises demand falls
YED Luxury and inferior goods
> 1 luxury
Negative = inferior
XPED
Positive = substitutes Negative = complementary
What does commodity mean
Goods that are traded in bulks such as raw materials
- inelastic in short run
- elastic in long run
Factors affecting price elasticity of supply. Time
More elastic over time
Factors affecting price elasticity of supply. Type of product
Raw materials=inelastic
Factors affecting price elasticity of supply. Availability of stock
Firms that hold stock have more elastic supply
Factors affecting price elasticity of supply. Availability of spare capacity
More spare capacity = more elastic supply
Factors affecting price elasticity of supply. Number of firms in the market
No Barriers of entry= more elastic supply
