Elasticity Estimates Flashcards
What is price elasticity if demand?
We know somthing about the “ Nature” of the relationship between DEMAND for a PRODUCT and its price
Price elasticity of demand
PED= % change in QD of a good
% change in demand for a good
Eg. Supermarket beef prices fall by 10%, consumers by 20% more beef, we say the PED is -2
PED= 20%
10% = -2
PED used to CATEGORIZE different types of a good
PED estimates always - demand curve slopes downwards
PED used to catagorise good as ELASTIC or INELASTIC
Price elasticity estimates
Using beef demand, PED of -2 means demand is elastic
If beef prices fell by 10%
Where demand for goods is elastic, consumers are relitively RESPONSIVE
PED estimates for goods are affected by
MORE SUBSTITUTES- high elasticity
Necessities with food substitutes
What is Cross price elasticity of demand ( CPED) 💶?
CPED estimates can me POSITIVE or NEGATIVE
Estimates for substitute goods will always be positive
Eg. CPED = 0.5
Increase in the PRICE of beef will cause an increase in DEMAND for lamb
Estimates for COMPLEMENTS will always be negative
E.g CPED -1.5
I.e increase in price of cars will mean decrease in demand for petrol
What is income elasticity of demand(IED) ?
Income elasticity of demand means that the demand for a good changes as income changes
IED = % change in QD of a good
% change in income
Coefficient is normally positive as higher incomes normally mean higher demand for most types of goods
Exception relates to INFERIOR GOODS in which consumption goes down as incomes go up
Income elasticity estimates
IED is used to classify goods
Normal goods IED > 0
This refers to most goods
INFERIOR GOODS IED < 0
Imferior goods refers to low cost and low quality goods consumed when income is a severe constraint
Research suggest that these include cheap food staples such as white bread 🍞
Goods with IED > 1 are LUXURY GOODS💎
What is income elasticity of demand?
Income elasticity of demand - demand for a good changes as income changes
IED =% change in QD of a good
% change in income
COEFFICIENT is normally positive I.e higher incomes mean higher demand for most types good “normal goods”
Exception relates to “INFERIOR GOODS” where consumption goes down as incomes go up
How does IED relate to luxury goods ?
Goods with IED > 1 are “luxury goods” in economic terms
If incomes increase by 10%, demand is up by more than 10%
Research suggest these include wines/ spirits, food service, home technology
Irish household Budget survey useful source of info on changing spending patterns
How does IED relate to necessity goods?
NECESSITY GOODS in economic terms have IED between 0 and 1, positive but low
I.e 10 % increase in Income leading to 5 % increase in demand
BASIC COMMODITIES e.g certain household staples, food have low IED
LOW IED means demand for basic items is sluggish in mature economies, but higher in rapidly growing poorer countries
What is the relevance of elasticity estimates?
Knowledge of both PED and IED is important for business sector and policy makers.
Underpins GOVERNMENT POLICY -TAX goods for which demand is INELASTIC
Taxation of alcohol, cigarettes and financial services in government budget -“old reliables”
Taxation as a signal to consumers to change behavior -fossil fuels, energy dense foods
POLITICAL SENSITIVITY of taxation on food and other necessities e.g CARBON TAX, SUGAR TAX
Social Equity and Taxation
REGRESSIVE TAXATION - taxes which hit lower Income household harder
E.g spending on food and energy take up greater share of poor households budget
What is the relevance of elasticity estimates for business people👩🏼💼?
Market information underpins approach to PRICING DECISIONS
Decisions made based on how price sensitive their customers
Where consumers are very price sensitive, producers will INCREASE REVENUE if they DECREASE the PRICE of their goods
Where consumers are INSENSITIVE to price change producers will INCREASE REVENUE if they INCREASE the PRICE of their goods
What are supply elasticities ?
Price Elasticity of Supply (PES) tells us how strongly producers react when a price changes
Similar concept to elasticity of demand
PES = % change In Qs of a good
% change in its price
How do supply elasticity’s work
If beef beef prices fall by 10% and producers supply 5% less beef , PES =0.5
- 5%
- 10% = 0.5
Supply elasticities are always POSITIVE
Supply of a good can be INELASTIC or or ELASTIC
E.g where quotas on production exist PES may be close to 0
What does a supply curve look like?
Supply curve is vertical -no change in production. Irrespective of changes in price
Where PES = 0
