Elasticity Flashcards
what is elasticity
a measure of how buyers and sellers respond to changes in market system
demand is said to be elastic if ….
quantity demanded responds substantially to a change in price
demand is said to be inelastic if …
quantity demanded responds slightly to a change in rpice
define the elasticity of demand
a measure of how much the quantity demanded of a good responds to change in price of that good
how to calculate price elasticity of demand
ped = % change in demand / % change in price
is PED always negative or positive
negative so we use its absolute value
if ped is less than 1 is it elastic or inelastic
inelastic (does not respond strongly to changes)
if ped is greater than 1 is it elastic or inelastic
elastic (responds strongly to changes)
what determines price elasticity of demand
Availability of substitutes Necessities/luxuries definition of the market time horizon income
does availability of close substitutes make demand curve more elastic or inelastic
elastic as people will easily switch to the close substitutes
do necessities have an elastic or inelastic demand curve
inelastic as people still need to use them eg electricity
do luxuries have a n elastic or inelastic demand curve
elastic as people will stop buying if prices rise too much
How does definition of the market effect price elasticity of demand
eg narrow categories tend to have a more elastic demand curve eg ice cream. General categories eg food don’t
does time make a curve more elastic or inelastic
more elastic overtime eg change in price in petrol wont have an immediate effect but over time people will drive less or drive hybrid cars
general rule, the steeper the demand curve the more …. it is
elastic
perfectly price inelastic is in what shape
I
what does perfectly price inelastic mean
the quantity demanded does not repsond to the change in price
example of goods that are perfectly price inelastic
necessities with no substitutes eg medicine
what is the PED of a perfectly price inelastic demand curve
0
what is the PED of a perfectly price elastic demand curve
infinity
perfectly price elastic is in what shape
what does perfectly price elastic mean
the price is constant
examples of perfectly price elastic
goods with a perfect substitute eg electricity historically when there was only one supplier
what is unit price elastcity
quantity demanded changes by the same percentage of the price (PED =1)
If given a specific brand name will it be elastic or inelastic
elastic (easily switch to another brand)
why are goods/services more elastic over time
changes are hard to make in a short period of time where as over time its easier to change
examples of changes over time on the supply side
Building new factories and hiring new workers
does the tax burden fall on the more elastic or inelastic side of the curve
inelastic as the elastic will move away and reduce demand when prices are increased with tax. Where as inelastic wont move away eg cigarrette smokers are addicted so wont respond to the price changes
example of inelastic supply
water, food
example of elastic supply
harvested goods, land can be used for other foods. This is usually done too (Crop rotation)
an example of how elasticity is useful
elasticity allows us to think in percentage terms eg changing the amount of time that people have to be living apart before they get divorced say by 20%, by what percentage would divorce rates increased by
