Elasticity of Demand and Supply Flashcards
Demand
The quantity of a good/service consumers are willing and able to buy of a given price in a given time period.
Law of Demand
There is an inverse relationship between price and quantity demanded. As price increases, Quantity of demand decreases and vice versa.
What is Supply?
The quantity of a good/service producers are willing and able to produce at a given price in a given time period.
Law of Supply
There is a direct relationship between price and quantity supplied. As price increases, Quantity of Supply increases and vice versa.
What is PED?
Measures the responsiveness of quantity demanded given a change in price.
Equation for PED?
%Change in quantity demanded / % change in price
Equation for change in?
Difference/ Original x 100
is PED always positive or negative?
always negative. The price elasticity of demand is ordinarily negative because quantity demanded falls when price rises, as described by the “law of demand”.
If PED is more than 1 what does it mean?
Demand is price elastic
If PED is less than 1 what does it mean?
demand is price inelastic
If PED is =0 what does it mean?
perfectly price inelastic
If PED is infinite what does it mean?
perfectly price elastic
If PED is 1 what does it mean?
demand is unit price elastic
What is price elastic supply ?
Measures the responsiveness of quantity supplied given a change in price.
equation for PES?
%change in quantity of supply/ %change in price
is PES always positive ?
yes because this is because the change in price and quantity are either both positive or both negative. If price goes up, quantity supplied goes up; if price goes down, quantity supplied goes down too.
What is Supply?
the quantity of a good/service producers are willing and able to produce at a given price in a given time period
What is law of supply?
there is a direct relationship between price and quantity supplied. As price increases quantity of supply increases and vice versa.
if PES is more than 1?
supply is price elastic
if PES is less than 1?
supply is price inelastic
if PES is equal to 0?
supply is perfectly price inelastic
if PES is infinite ?
perfectly price elastic
if PES is equal to 1?
supply is unit price elastic
Cross elasticity of demand
measures the responsiveness of quantity demanded of a good/service given a change in price of another.
equation for xed ?
%change in quantity demand of good A / % change in price b
if xed is positive what does that mean?
it is a substitute - if price product A goes up , demand for the other product B will also go up
if xed is negative what does that mean?
it is a compliment - if price product A goes up , demand for the other product B will go down.
if XED is more than 1?
demand between the goods is price elastic ( strongly related)
if XED is less than 1?
Demand between the goods is price inelastic (weakly related)
if XED =0?
demand between the goods is perfectly price inelastic ( no relationship)
what is yed? ( income of elasticity of demand)
measures the responsiveness of quantity demanded given a change in income.
equation for yed?
%change in quantity demanded / % change in income
if yed is positive it means?
if its is positive it is a normal good - as income goes up quantity goes up
if yed is negative it means?
if its is negative it is a inferior good - as income goes up quantity goes down
if yed is more than 1 ? (for normal goods)
demand is income elastic normal luxury
if yed is less than 1 ? (for normal goods)
demand is income inelastic normal necessity
if yed is more than 1 ? ( for inferior goods)
demand is income elastic
if yed less than 1 ? ( for inferior goods)
demand is income inelastic
if yed is equal to 0
demand is perfectly income inelastic
