elasticity of demand Flashcards
What is price elasticity of demand?
Elasticity of demand refers to the change in quantity demanded in relation to change in price.
When does elastic demand occur
Elastic demand occurs when the change in a product’s quantity demanded is greater than a change in price.
It is usually represented by a “flatter” demand curve.
Example of elastic demand
Boats
Example of inelastic demand
Oil, bread
What effects elasticity of demand
- Availability of substitutes
- Whether it is a luxury or necessity
- Time
- Proportion of Income speed
How does Quantity react to price for inelastic goods?
Quantity is INSENSITIVE to price change
What happens to the purchase of inelastic goods when there is a change in price?
People will continue to buy the product, and the same amount of the product despite fluctuating pricing. If price increases, demand will decrease a little. And if price decreases, demand will increase a little bit. Ceteris Parabus.
Perfect inelasticity number
0
What is unitary elasticity?
1
What is Total Revenue?
Total Revenue refers to the total amount of income business or firms gain from selling a good or service.
> 1 and <1 meaning.
More than 1 means Elastic
Less than 1 means Inelastic
Do producers want to have elastic or inelastic goods and why? What is the effect?
A business wants to sell more inelastic goods. This means that consumers will not react as much to an increase in price. This will increase revenue and profit.
What happens to the purchase of inelastic goods when there is a change in price?
People will continue to buy the product, and the same amount of the product despite fluctuating pricing. If price increases, demand will decrease a little. And if price decreases, demand will increase a little bit. Ceteris Parabus.
How to calculate ped?
percentage change in quantity/ percentage change in price
perfectly inelastic demand
If a change in price results in no change to quantity demanded,
the ED = 0 (perfectly inelastic)
perfectly elastic demand
If a change in price results in infinitely large change in quantity demanded,
the ED = ∞ (perfectly elastic)
inelastic demand
Inelastic demand occurs when the change in a product’s quantity demanded is less than a change in price. It is usually represented by a “taller” demand curve.
define the factor AVALABILITY OF SUBSITUTES
The greater number of close substitutes the good has, the more price elastic its demand. if the price of good rises, and it has many substitutes then consumers will be sensitive to the price change
good with few substitutes have such as petrol would very inelastic.
the demand for petrol is inelastic because it has few substitutes
define the factor TIME
if the consumers have time to respond to a price change, then demand will be more price elastic
in the immediate run, demand for most commodities will be relatively inelastic because consumers do not have the time to adjust their consumption to find substitutes
in the long run, consumers can fully adjust to the change in the market conditions
define the factor LUXURY OR NECCESSITY
necessity type goods such as basic items of food will be more price inelastic than luxury type goods such as jewellery, designer hand bags
goods such as bread, milk, rice will be relatively inelastic in demand because these are essential food groups
if people need something they will continue buy in almost same amount even if the price increases
if an item is luxury, an increase in price will decrease the quantity demanded as people don’t need luxury
define the factor Proportion OF INCOME SPENT
expensive goods are likely to be relatively price elastic because they take up a larger proportion of a consumer’s income or budget
cheaper, inexpensive items will be relatively inelastic because they take a small proportion of income
example of time determinant
if petrol prices jump to very high levels, most consumers cannot change their consumption in the immediate because they need to go to work
if petrol remains high over a long period, then people will be able to respond and adjust to their consumption by using public transport or switching electric cars
Unitary Elasticity
quantity demanded will change by the same proportion as the price change
