Elasticity of Demand and Supply Flashcards
chapter 6
what is elasticity?
a measure of responsiveness (sensitivity) of the quantity demanded of a good to a change in some variable.
what is price elasticity ?
the change in quantity demanded of a good caused by a change in the price of a good itself.
what is income elasticity?
the change in quantity demanded of a good caused gy a change in the consumers income
what is cross elasticity?
the change in quantity demanded of a good caused by a change in the price of a substitute/ complementary good.
the PED of a good is greater than 1
the good is elastic
can be minus or plus
the PED of a good is exactly 1
the good is unit elastic / unitary
plus or minus
the PED of a good is zero (0)
the good is perfectly inelastic
the PED of a good is less then 1
the good is inelastic
can be minus or plus
the PED of a good is infinity
the good is perfectly elastic
when is a good relatively elastic ?
when the proportionate/percentage change in quantity demanded of a good is greater than the proportionate/ percentage change in the price of the good itself.
when is a good perfectly elastic?
when any increase in the price of that good results in its quantity falling to zero
when is a good said to be unitary elastic?
when the proportionate/percentage change in the quantity demanded of a good is equal to the proportionate/percentage change in the price of that good.
when is a good relatively inelastic?
if the proportionate/ percentage change in quantity demanded of a good is less than the proportionate/ percentage change in price of that good.
when is a good perfectly inelastic?
if the proportionate / percentage change in the price of a good causes no change in the quantity demanded of that good.
what happens to the Total Revenue (TR) if the PED is greater than 1
elastic…
TR will move in the opposite direction to the price change
what happens to the TR if the PED is less than 1
inelastic…
TR will move in the same direction as the price change
what happens to the TR if the PED is 1
unitary elastic…
TR will not change no matter what direction the price changes
Formula of PED
changeQ / changeP * P1 + p2 / Q1 + Q2
a negative PED
depicts a normal good that obeys the Law of Demand.
a positive PED
depicts a good that does not obey the law of demand (e.g. given good, inferior good,…)
what factors can affect the PED of a good
availability of close substitutes, complementary goods, proportion of income spent on it, durability expectations brand loyalty alternative uses of a good
why is it important to understand elasticity ?
TAXATION: if demand is inelastic, taxes may be increased and TR increases
BUSINESSPEOPLE: if the demand is elastic, lowering the prices will increase sales and TR
INTERNATIONAL TRADE: how are imports and exports affected
what are substitute goods of CED
goods that satisfy the same needs and act as alternatives to each other.
There is a positive relationship between price of good A and quantity of good B
e.g. Dif. cereals, teas,…
what are complementary goods of CED
goods that are interrelated snd should be used in conjunction with each other.
there is a negative relationship between price of good A and quantity of good B.
e.g.cars + petrol, cereal + milk
