Elasticity Flashcards
Define PeD
Responsiveness of quantity demanded to a change in price
What is the formula for PeD
%change in P
what does it mean if the value is greater then one
it is elastic
what does it mean if the value is lower than one
it is inelastic
In PeD what does a steep demand curve imply
PeD is inelastic
In PeD what does a flat demand curve imply
PeD is elastic
How does substitutability effect PeD
The more close substitutes a product has the more elastic is.
How does time effect PeD
In the short run Ped for many products will be price inelastic because customers cannot easily change to a different provider. Furthermore PeD may be more inelastic in the long run as consumers get used to the price change and go back to the product.
How does a product being a necessity effect PeD
Necessities are more inelastic because regardless of the price consumers still need to buy them. However PeD would not be 0 because consumers can reduce the usage of the necessity.
If PeD is elastic how is it related to TR
Inversely related
If PeD is inelastic how is it related to TR
Positive correlation
How can brand loyalty effect PeD
The higher the brand loyalty the more inelastic the product because consumers are willing to pay a higher price
Define PeS
The responsiveness of quantity supplied of a product to changes in the price of the product
What is the formula for PeS
% change in P
What does a flatter supply curve say about the elasticity
more elastic
What does a steeper supply curve say about the elasticity
more inelastic
What effect PeS
Availability of materials and other factors of production, spare capacity, time, distribution systems and having flexible workers who can do a range of jobs.
How does time effect PeS
In the short run PES is more inelastic because of the difficulty in redirecting capital and labour towards increased production and the costs of laying off staff and mothballing production lines. In long run staff can be retrained, land ca be repurposed and capital retasked.
How does spare capacity affect PeS
The more spare capacity a business has the more elastic it is as it has more resources and can help increase output without a change in price
How does distribution systems effect PeS
The better the distribution system the more elastic the product is. This is because it can unlock a new market to sell the product to making it worth the manufacturers time to switch and making them more willing. Also decreases production time and making it more efficient so the production costs are lower and creating higher profit. Again making the manufacturer more willing
How does availability of materials/ workers effect PeS
The more available the materials the more elastic it is as the manufacturer is able to switch products quicker. The less skilled the workers needed are the more elastic the product as it easier to get unskilled workers and therefore easier to change.
Define YeD
Responsiveness of quantity demanded to a change in income.
What is the formula for YeD
% change in Y
What does it mean if YeD is a negative
The good is an inferior good e.g. bus travel, poundland
What happens to demand for inferior goods when income increases
demand decreases
What are inferior goods
‘saver’ or ‘economy’ products that we switch to when times are rough
What effects YeD
If the good is a necessity/luxury
How does a necessity effect YeD
They are inelastic as we still need the product no matter the RDI
Define XeD
Responsiveness of quantity demanded of good A to a change in price of good B
What is the formula for XeD
% change P of B
What does an elastic + sign mean in XeD
close substitutes
What does an inelastic + sign mean in XeD
distant substitutes
What does an elastic - sign mean in XeD
close complement e.g. games and consoles
What does an inelastic - sign mean in XeD
distant complements e.g. car sales and car insurance
What does a result of 0 mean in XeD
the products re unrelated
What does low XeD allow
More freedom to change prices
How does time effect XeD
Changes may only be short term and the effect of a change in price my wear off as consumers get used to the price change.
What are the 4 key influences on ped
- Number of close substitutes
- Whether the good is perceived as a necessity or a luxury
- The proportion of income/expenditure devoted to the good
- Whether the good is habit forming
- Time period over which the elasticity is considered
Analysis of inelastic ped diagram
The equilibrium P0, Q0 leads to a total revenue of size P0xQ0. the second equilibrium P1,Q1 has a higher total revenue P1xQ1. This is because due to the relatively inelastic demand curve, the price rises from P0 to P1 by a larger percentage than the percentage that the quantity produced falls from Q0 to Q1.
How is ped useful to a firm
inelastic ped for a product allows a firm to increase total revenue by increasing the price. A firm with no (or few) competitors is likely to face this.
Elastic ped for a product allows a firm to increase total revenue by decrease the price. A firm with many competitors is likely to face this.
How is ped useful to the government
Inelastic ped allows the government to increase the size of a tax and increase the tax revenue earned e.g. fuel duty.
Elastic ped increases the effectiveness of a subsidy as it leads to a larger increase in the consumption of the good/service than an inelastic ped.
What is a normal good
one where the quantity demanded increases in response to an increase in consumer increases
What is a superior good (luxury good)
One for which the income elasticity of demand is positive, and greater than 1, such that as income rises, consumers spend proportionally more on the good
Yed firms analysis
Consumer incomes will increase if the national minimum wage increases, the government will inform businesses of this several months before the increase takes place. Producers then expect consumer incomes to increase, and can therefore plan for the impact of this increase.
e.g. normal good producers will expect an increase in sales, though a smaller increase than the increase in wages
How is yed useful for firms
Use of yed allows firms to predict the impact of changes in GDP on demand for their goods and services, as changes in GDP lead to changes in income.
Use of yed allows firms to predict the impact of changes in government policy on demand for their good or services, if the policy changes consumer incomes.
How is yed useful for the government
Use of yed allows the government to calculate how affordable increases in NMW is, as government can calculate how much of the pay rise they will receive in tax revenue.
Use of yed allows the government to calculate how affordable increases in pay is for public sector workers, as government can then calculate how much of the pay award they will receive in tax revnue.
How is YES/XED/PES/PED not useful to firms
estimates of yed may prove to be unreliable; they may be based on historical data which may not be relevant to the current or future prospects of the firm
How is YED/XED/PES/PED not useful to the government
estimates based on surveys may be unreliable in the long run because consumers preferences change over time
XED firms analysis - responding to a change in price
Following the fall in price of a competitors good, they can predict the extent to which demand for their substitute good falls. This enables the form to take mitigating action such as launching an advertising campaign to reduce XED or lower the price of their good too
XED firms analysis - changing the price
A firm can use its understanding of XED to lower the prices of one good, and predict the size of the increase in sales of a complementary good. This allows a firm to price a product as a loss leader, making a loss on each sale, but increase the sales of other complementary goods and increase the amount of profit made over all
XED government analysis
Government can use its understanding of XED to predict the impact of changes in train fares on CO2 emissions. The government controls the maximum price increases allowed each year by train franchisers such as West Midlands Trains. If the government knows that train and car journeys are substitute goods, then they can predict the extent to which a rise in the price of train travel will lead to a rise in the demand for car travel, and the size of the subsequent increase in CO2 emissions.
How is XED useful to firms
A firm can use its understanding of XED to lower the prices of one good, and predict the size of the increase in sales of a complementary good. This allows a firm to price a product as a loss leader, making a loss on each sale, but increase the sales of other complementary goods and increase the amount of profit made overall.
How is XED useful to the government
A firm can use its understanding of XED to lower the prices of one good, and predict the size of the increase in sales of a complementary good. This allows a firm to price a product as a loss leader, making a loss on each sale, but increase the sales of other complementary goods and increase the amount of profit made overall.
How does stocks of finished products and components effect PES
with high stocks a firm is able to quickly respond to changes in demand (more elastic)
How does the ease and cost of factor substitution/mobility effect PES
Capital can be switched more easily if it has multiple potential uses like a printing machine or a van, leading to a more elastic PES because productive capacity can be switched from one market to another.
Labour can be switched more easily if lower skills are required as there is a larger pool of potential workers available, and it takes less time to train new workers
What are the methods of improving speed of response to market conditions
- upgrading technology
- increase spar stock
- prolonging shelf life of products
- better distribution systems
- Improved training of workers
- (Government only)Allowing inward migration of labour if there is a labour shortage
PES analysis - firms
a firm can model how responsive the market in which it operates is to changes in price. If the firm can improve its own responsiveness to changes in market conditions by developing alternative uses to its capital then, following a fall in price, the firm can be more responsive than its competitors and cut production faster
PES analysis - government
Government can use its understanding of PES to identify with highly inelastic supply curves and judge the impact of interventions.
The supply of agricultural products has an inelastic PES because of the time they take to grow, their seasonality and their perishability. The government can help the market become more flexible by developing new strains of crops that can be planted earlier or later in the year, or by investing in storage capacity in technology. This will make the PES of agricultural products more elastic by making producers able to respond to changes in market conditions more quickly.
How can PES help a firm
Use of PES allows firms to model the impact of a tax and the size of the consumer and producer burden, so firms can predict the size of the reduction in profit
How can PES help the government
Use of YED allows the government to calculate how affordable increases in NMW is, as government can calculate how much of the pay rise they will receive in tax revenue.
Use of PES allows the government to judge the impact of information campaigns that change the tastes of consumers, shifting the demand curve. The more elastic PES, the more the shift in demand will impact the quantity consumed
