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Econ Micro Section 2 > Elasticity of demand ( 1 ) > Flashcards

Elasticity of demand ( 1 ) Flashcards

1
Q

What does PED measure?

A

The price elasticity of demand is the responsiveness of a change in demand to a
change in price

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2
Q

What is the formula for PED?

A

PED = Percentage change in Q demanded / Percentage change in price

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3
Q

What is a price elastic good?

A

Very responsive to change in price, numerical value is PED > 1

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4
Q

What happens if the PED > 1?

A

Good is elastic.

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5
Q

What does an elastic good mean?

A
  • Very responsive to change in price.

* A percentage change in price will cause a larger percentage change in quantity demanded

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6
Q

What does the size of the PED affect?

A

The larger the PED, the more elastic demand is for the good.

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7
Q

What is perfectly elastic demand?

A
  • PED of infinity.
  • Any increase in price will mean that demand will fall to zero.
  • Consumers are willing to buy all that they can at price P, but none at a higher price.
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8
Q

what happens if the PED is between 0 and 1?

A

• The demand for goods is inelastic.

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9
Q

What does an inelastic demand mean?

A

• A percentage change in price will cause a smaller percentage change in quantity demanded.
• A price inelastic good has a demand that is relatively unresponsive to a change in
price.

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10
Q

What is unitary elastic demand?

A

Change in demand equal to the change in price, PED = 1.

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11
Q

Where do you get unitary elastic demand?

A

At a PED of 1.

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12
Q

What is a perfectly inelastic good?

A

Good that has a demand which does not change when price changes, PED = 0

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13
Q

What is a perfectly elastic good?

A

Good has a demand which falls to zero when the price changes, PED = Infinite

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14
Q

What effect does change in price have on quantity demanded?

A

Has no effect on quantity demanded, at any price the quantity demanded is the same.

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15
Q

What factors influence PED?

A
  • Necessity
  • Substitutes
  • Addictiveness
  • Proportion of income spent on the good
  • Durability of the good
  • Peak & Off peak demand
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16
Q

How does necessity affect PED?

A

A necessary good, such as bread or electricity, will have a relatively inelastic demand.
In other words, even if the price increases significantly, consumers will still demand
bread and electricity, because they need it. Luxury goods, such as holidays, are more
elastic. If the price of flights increases, the demand is likely to fall significantly.

17
Q

How do substitutes affect PED?

A

• The more substitutes a good has, the more price elastic demand is, if there are many substitutes available then consumers can easily switch to something else if the price changes.

18
Q

What does the no. of substitutes depend on?

A

How closely it is defined.

19
Q

How does the demand for essentials differ to non essentials?

A

Essential items are price inelastic

Non essential items are price elastic

20
Q

What is the demand for habit forming goods?

A

Price inelastic

21
Q

What is the demand for purchases that cannot be postponed/necessities?

A

Price inelastic

22
Q

What is the demand for products with multiple uses?

A

Inelastic

23
Q

How does addictiveness affet PED?

A

The demand for goods such as cigarettes is not sensitive to a change in price because
consumers become addicted to them, and therefore continue demanding the
cigarettes, even if the price increases.

24
Q

How does proportion of good influence PED?

A

Demand for products that need a large proportion of the consumer’s income is more price elastic than demand for products that only need a small proportion of income.
Consumers are more likely to shop around for the best price of an expensive good.

25
Q

How does time affect PED?

A

In the long run demand becomes more price elastic as it becomes easier to change to alternatives because customers have had the time to shop around, in the long run consumer spending habits may change leading to a shift towards a different product.
In the short run consumers may be unwilling to change products initially.

26
Q

How does time ( demand ) affect PED?

A

During peak times for transport, demand for tickets is more price inelastic.

Econ Micro Section 2 (7 decks)

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