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
what is the closest substitute to a good?
negative relationship ( - ) & the bigger number
formula of CED
changeQa / changeQb * P1b + P2b / Q1a + Q2a
formula of YED
changeQ / change Y * Y1 + Y2 / Q1 + Q2
a positiv YED result
a normal good
(more will be bought as income increases)
NECESSITY = between 0 and 1 LUXURY = bidder than 1
a negativ YED result
an inferior good
less will be bought as income increases
a good with zero YED
goods that people purchase when their income is low. They do not purchase additional quantities of these goods when their income increases
e.g. salt
The PED values of 3 dif. goods are
A= -2.5 B= -1.0 C= -0.5
how can you maximize revenue for those goods?
The price of good A should be decreased to maximize sales.
The Price of good B should be left as it is, since a change wouldn’t make any difference in revenue.
The Price of C should be increased, since consumers would still buy it and your TR increases.
