Elasticity Flashcards
What are the three major types of elasticity?
1) (Own) Price Elasticity of Demand (PED)
2) Cross-Price Elasticity of Demand (EX)
3) Income Elasticity of Demand (EY)
What is PED?
Price Elasticity of Demand
What is EX?
Cross-Price Elasticity of Demand
What is EY?
Income Elasticity of Demand
If a PED value is more than 1, what is this referred to as?
Price elastic
If a PED value is less than 1, what is this referred to as?
Price inelastic
If a PED value is exactly 1, what is this referred to as?
Unitary price elasticity
Price elastic would be a PED value of what?
More than 1
Price inelastic would be a PED value of what?
Less than 1
Unitary price elasticity would be a PED value of what?
Equal to 1
Why might it be important for a business to understand the price elasticity of a product?
If a product is price elastic (an increase in price would lead to far greater drop in demand) then it is not in the interests of a business to pursue a strategy as less sales would lead to a fall in income.
What are the three special cases limiting Price Elasticity on Demand?
1) Demand is perfectly elastic (perfect competition)
2) Demand is perfectly inelastic (essentials like water, or heroine for an addict)
3) Demand elasticity is at unity
What are some factors that determine price elasticity demand?
1) Substitubality
2) % of income
3) Necessities or luxuries
4) The ‘width’ of the market definition
5) Time
What is the calculation for Price Elasticity of Demand (PED)?
% change in the qty demanded
Divided by
% change in the price
What is the calculation for Cross-Price Elasticity of Demand (EX)?
% change in the qty demanded of Good A
Divided by
% change in the price of Good B
What is the calculation for Income Elasticity of Demand (EY)?
% change in qty demanded of A
Divided by
% change in consumer’s income
What is price elasticity of supply?
The % change in supply relative to a % change in price.
What is the calculation for Price Elasticity of Supply (ES)?
% change in qty supplied
Divided by
% change in price
What are the main conditions of supply? SHIFTS of the curve
1) Costs of production
2) Technical progress
3) Taxes and other duties
4) Subsidies
What are the factors determining price elasticity of supply? SLIDES along the curve
1) Length of production period
2) Spare capacity-to react to increased demand
3) Ease of stock accumulation
4) Ease of switching production methods
5) Number of firms in the market
6) Time to react to change in demand
