Elasticity of Demand Flashcards
1
Q
Price Elasticity of Demand Definition
A
The responsiveness of demand to a change in price.
2
Q
PED Coefficients
A
0 = Perfectly Inelastic
0 - -1 = Inelastic
-1 = Unitary/Constant Elasticity
-1 - ∞ = Elastic
∞ = Perfectly Elastic
3
Q
Can Perfectly Elastic or Inelastic Coefficients exist in Practice
A
No, they are theoretical book-ends.
4
Q
PED Formula
A
Dinner/Plate
(∆ Demand %/∆ Price %)
5
Q
Determinants of PED
A
- Substitutes, number and closeness of available substitutes.
- Time, in the short run products are more likely to be price inelastic.
- Market “width”, Products become more inelastic as we widen the market.
- Necessity or Luxury, necessities are inelastic.
- Percentage of income, big ticket items are more elastic.
6
Q
Income Elasticity of Demand Definition
A
The responsiveness of demand to a change in income.
7
Q
YED Coefficients
A
-1 - +1 = Inelastic
-∞ or +∞ = Elastic
8
Q
Determinants of YED
A
- Necessity or Luxury, Necessities are inelastic.
- Level of Income of Consumer, poorer consumers tend to send their income on necessities, wealthier consumers spend their income on more luxuries.
- Standard of Living, Wealthier countries have consumers with more disposable income.
- Economic Cycle, when the economy is in decline, disposable incomes decrease and less is spent on luxury goods.
9
Q
Cross-elasticity of Demand Definition
A
The responsiveness of demand for one good to a change in price of another good.
10
Q
XED Coefficients
A
-1 - +1 = Inelastic
-∞ or +∞ = Elastic
0 = No relationship
11
Q
Determinants of XED
A
- Substitutes, positive XED, close substitutes have a higher XED (Elastic), as more sensitive to other product. Weak substitutes have lower XED (Inelastic).
- Complements, negative XED, close complements have a higher XED (Elastic). Weak complements have a lower XED (Inelastic).
