Elasticity of Demand and Supply Flashcards
Define PED
Price Elasticity of demand (PED) refers to the degree of responsiveness of quantity demanded of a good o a change in the price of the good itself, ceteris paribus
How to calculate PED?
PED = % change in quantity demanded/ % change in price
What does it mean if |PED|>1?
Demand is price elastic, a change in price will result in a more than proportionate change in quantity demanded.
E.g Air travel for leisure travellers
What does it mean if 0<|PED|<1?
Demand is price inelastic, change in price will result in less than proportionate change in quantity demanded. E.g Rice in for Asian societies
What does it mean if |PED| = infinity?
Demand is perfectly price elastic, change in price will result in quantity demanded to fall to 0.
E.g Homogenous goods in perfectly competitive market
What does it mean if |PED| = 0
Demand is perfectly price inelastic, change in price will lead to no change in quantity demanded.
E.g Patient’s demand for drugs with no substitutes
What does it mean if |PED|=1?
Demand is unitary elastic, change in price will result in equal change in quantity demanded.
What are the determinants of PED?
Time Period, Proportion of income, Number of Substitutes, Degree of Necessity
How do you find producer revenue/consumer expenditure?
Price x Quantity
Define YED
Income elasticity of demand refers to the degree of responsiveness of the demand for a good to a given change in the income of consumers, ceteris paribus.
How to calculate YED?
YED = % change in quantity demanded / % change in income
What does it mean if 0<YED<1?
The good is a necessity and demand is income inelastic, increase in income leads to a less than proportionate increase in demand.
What does it mean if YED>1
The good is a luxury good, demand is income elastic, increase in income leads to a more than proportionate increase in demand.
What does it mean if YED<0
The good is an inferior good, demand is inversely related to income
What is the determinants of YED?
Degree of necessity and consumer’s income levels/country’s stage of development.
Define XED
Cross elasticity of demand (XED) refers to the degree of responsiveness of demand for a good to a given change in the price of a related good, ceteris paribus.
How to calculate of XED?
XED = % change in quantity demanded for Good A/ % change in price for Good B
What does it mean if 0<XED<1 and positive?
The goods are weak substitutes, an increase in price of Good A results in a less than proportionate increase in demand for Good B.
What does it mean if XED>1 and positive?
The goods are close/strong substitutes, an increase in price of Good A results in a more than proportionate increase in demand for Good B.
What does it mean if 0<XED<1 and negative?
The goods are weak complements, an increase in price of Good A results in a less than proportionate fall in demand for Good B.
What does it mean if XED>1 and negative?
The goods are close/strong complements, an increase in price of Good A results in a more than proportionate fall in demand for Good B
What does it mean if XED = 0?
The goods are not related at all, if price of a good rises, demand of another good remains unchanged.
Define PES
Price elasticity of supply refers to the degree of responsiveness of quantity supplied of a good to a given change in the price of the good itself, ceteris paribus.
How to calculate PES?
PES = % change in quantity supplied/ % change in price
What does it mean if PES>1?
Supply is price elastic, a given change in price brings about a more than proportionate change in quantity supplied.
E.g Canned Food
What does it mean if 0<PES<1?
Supply is price inelastic, a given change in price brings about a less than proportionate change in quantity supplied.
E.g Agriculture goods
What does it mean if PES = infinity
Supply is perfectly price elastic, producers are willing to sell at whatever quantity they want at the given price.
What does it mean if PES = 0?
Supply is perfectly price inelastic, a fixed quantity that the producer must sell regardless of the price.
Eg. concert performance in a fixed capacity venue
Determinants of PES
Factor Mobility of FOPs, Inventory Level, Nature of Good, Time Period, Spare Capacity
