Elasticity of Demand Flashcards
What is price elasticity of demand?
It measures the responsiveness of quantity demanded of a good or service, relative to changes in its price
How does an elastic good react to a change in price?
It is very responsive (flatter demand curve); change in price causes a more than proportional change in QD
How does an inelastic good react to a change in price?
It is not very responsive (steeper demand curve); change in price causes a less than proportional change in QD
What price elasticity has a co-efficient of less than one?
Inelastic goods
What price elasticity has a co-efficient of more than one?
Elastic goods
What price elasticity has a co-efficient of one?
Unitary goods
What are the features of an inelastic good?
- Few substitutes
- Necessities
- Addictive
- Cost is a small fraction of expenditure
- Goods which people will still need to buy regardless of price
What happens to total revenue when the price of an inelastic good increases?
Total revenue increases because people still purchase the goods
What are the features of an elastic good?
- Many substitutes
- Luxuries
- Cost is a high proportion of expenditure
- Goods which people can do without
What happens to total revenue when the price of an elastic good increases?
Total revenue decreases because people aren’t willing to purchase the goods when the price is too high
How do you calculate total revenue?
Price x Quantity sold
What happens to total revenue when the price of a unitary good increases?
Revenue is constant
What is the midpoint method formula for PED?
(change in QD/midpoint of QD) / (change in price/midpoint of prices)
What do you do when calculating the elasticity co-efficient?
Ignore the negative sign; write it as a positive
If percentages are given how do you calculate PED?
%change in QD / %change in price
