Elasticity Flashcards
What is elasticity ?
The responsiveness of a particular change to a good
What does inelastic mean ?
This is less than 1
It means the good is unresponsive to changes
What does elastic mean ?
This is more than 1
This means it is responsive to a change
What is the equation for price elasticity of demand ?
Ped = (change in quantity divided average quantity) divided by (change in price divided average price)
What does price elastic mean ?
This means that as the price changes slightly, there is a large change in the demand
What are perfectly inelastic goods ?
These are goods usually needed for everyday life e.g. petrol , oil
What are perfectly elastic goods ?
These are normally luxury goods e.g. yachts
What determines the price elasticity of demand ?
- The proportion of income spent on a good
- Time (might take time to update the demand / recognise change)
- The availability of substitutes
What is the price elasticity of supply ?
The ability of a business to respond to price changes in a given period of time
How to determine the price elasticity of supply ?
- Time - supply doesnt respond instantly
2. Factor inputes - factors required to produce the good
What does asymmetric information mean ?
When one side knows more than the other e.g. dentist
Examples of factor intensities ?
- Labour intensive = shoe production
2. capital intensive = chemical manufacture
Advantages of the firm ?
- savings on transaction costs - undertaking business
- The capacity to extend the division of labvour
- the potential to innovate
What is the valuation ratio =
The market valuation of the firm, expressed by :
Price of its shares divided by
the book value of assets
What does economies of scale mean?
When firms use their existing infrastructure to lever themselves into new markets
What is the concept ceteris paribus ?
This is a common assumption in economics that states that other things remaining the same
The purpose is to allow us to examine the influence of one factor at a time on something
What are movements along a demand curve called ?
Contractions or extensions in the quantity demanded
What is a normal good ?
A good that demand increases for as income increases
What is a complement ?
A good that is used with another good
What are factor inputs ?
Goods or services used in the process of production
What is a clear market ?
One which the wuantity demanded equals the quantity supplied
What does equilibrium price mean ?
This is one from which there is no tendency to change
What does excess supply mean ?
This occurs when the quantity supplied exceeds the quantity demanded at some fiven price
What is the single market programme ?
This is a concept applied across the EU where there is a unified market in goods, services, capital and labour
What does price transparency mean ?
This refers to how easily consumers in one country can understand prices in another country
Why do firms need to know about the price elasticity of demand ?
- It’s essential to understand consumer reactions to the pricing structures they set in particular markets
- Essential to manage excess supply etc.
What is international division of labour ?
This concept refers tp the specialisation in production which occurs in some nations
What is rational behaviour ?
This type of behaviour implies that economic agents act in their own best interests
