Elasticity Flashcards
PED
the responsiveness of demand to a change in price (price elasticity of demand)
PED equation
PED= %^in QD/ %^in P (always negative)
PED info
PED >1: the demand is very responsive to changes in price (relatively price elastic)
PED <1: the demand is very irresponsive to changes in price (relatively price inelastic)
PED =-1: unit elasticity
PES
the responsiveness of supply to a change in price (price elasticity of supply)
PES equation
PES= %^in QS/ %^ in P (always positive)
determinants of PES
Production
tIme
Spare capacity
Storage
THE INCIDENCE OF TAX
the proportion of tax increase if passed onto the customer. the size of the tax is the vertical distance between the two supply curves.
P1-P2: consumer pays
P1-P3: producer pays
incidence of tax’s impact on elasticities
- relatively price elastic demand: consumers respond to price change so firms pay majority of the tax
- relatively price inelastic demand: consumers are irresponsive so firms avoid paying tax themselves and pass over to consumers through price increases
YED
the responsiveness of demand to a change in income (income elasticity of demand)
YED equation
YED= %^ in QD/ %^ in Y
YED info
YED >1: relatively income elastic YED <1: relatively income inelastic >1: luxury good 0-1: necessity <1: inferior good
XED
the responsiveness of demand for good A to a change in price of good B (cross price elasticity of demand)
XED equation
XED= %^ in QD for good A/ %^ in P for good B
XED info
+ = substitute (-/-) e.g. playstation and xbox
- = complimentary (+/-) e.g. xbox and fifa
the greater the number the stronger the link
>1: strong substitute/ compliment
<1: weak substitute/ compliment
=0: no relationship
INTERRELATED MARKET
when a change in one market has an impact on another
