Elasticity (Demand) Flashcards
Elasticity is …
How responsive demand or supply is to a change in price
PED is ?
The responsiveness of a change in demand to a change in price
What is the PED formula ?
%(Change)QD/%(Change)P
What is a price elastic good …
Very responsive to a change in price, Change in price leads to an even bigger change in demand
What is the numerical value for PED ?
Greater than 1
What is a price inelastic good ?
A good that had a demand relatively unresponsive to a change in price
Numerical value of price inelasticity ?
PED is less than 1
A unitary elastic good …
has a change in demand equal to change in price
PED=1
A perfectly inelastic good ..
Has a demand that doesn’t change when price changes
PED=0
A perfectly elastic good ..
has a demand which falls to zero when price changes
PED = infinity
(Horizontal)
If a firm sells a good with an inelastic demand …
They are likely to put most of the tax burden on the consumer, most effective for raising government revenue
If a firm sells a good with an elastic demand …
They are likely to take most of the tax burden on themselves, which will lower their revenue, if government want to decrease demand
PED and total revenue:
Total Revenue = P times Q
If a good had inelastic demand firm can raise its P
If a good has an elastic demand and they raise P the q will fall
What is Income elasticity of demand ?
Responsiveness of a change in demand to a change in income
YED=
%(Change)QD/%(Change)Y
Inferior goods are..
Those which see a fall in demand as income increases
YED>0
Normal goods
Demand increases as income increases YED>0
Luxury goods
As income increases so does demand YED>1
what is cross elasticity of demand ?
responsiveness of a change in demand of one good X to a change in price of another good
What is the Equation of XED?
%(change)QD of X/%(change) P of Y
What XED do complementary goods have ?
Negative XED
What XED do substitutes have ?
Positive XED
And unrelated good have an XED of what ?
0
Why are firms interested in XED ?
Allows them to see how many competitors they have
If demand is more elastic what happens to the incidence of tax ?
Falls mainly on the supplier
If demand is more inelastic what happens to the incidence of tax ?
Fall mainly on consumer
What happens if demand is piece in elastic ?
Subsidy will have a large effect on price which gives a greater consumer gain
lowering price
What happens if the demand is price elastic ?
Subsidy will have a large effect on Q benefits the producer
