IB Elasticity Flashcards
Define price elasticity of demand
responsiveness/sensitivity of quantity demanded of a good from a change in its price
Formula for PED
percentage change in quantity demanded/percentage in price of a good
Define inelastic demand (3)
goods insensitive to changes in price
percentage change in quantity of goods/service < percentage change in price
0 < PED < 1
Define elastic demand (2)
goods sensitive to changes in price
percentage change in quantity demanded of goods/service > percentage change in price
PED > 1
Determinants of elasticity of demand (5)
number of substitutes
degree of necessity
income
addictiveness
time period
Define perfectly elastic demand (2)
change in price leads to infinite change in QD
PED = infinite
Define unitary elastic demand (2)
change in price leads to proportionally equal change in QD
PED = 1
Define perfectly inelastic demand (2)
change in price leads to no change in QD
PED = 0
Total revenue for inelastic goods (2)
price increase = TR increase
price decrease = TR decrease
Total revenue for elastic goods (2)
price increase = TR decrease
price decrease = TR increase
Total revenue for unitary elastic goods
price increase/decrease = no change
Define primary commodities (3)
raw materials
necessities with no close substitutes
gold, oil, food
Examples of manufactured goods (2)
produced by labour using capital + land resources
clothes, machinery
Define income elasticity of demand (YED) (2)
measure of how responsive quantity demanded is to a change in consumer income
percentage change in quantity demanded/percentage change in income
Inelastic YED (3)
0 < YED < 1
change in income leads to small change in quantity demanded
normal good
Elastic YED (3)
YED > 1
change in income leads to large change in quantity demanded
normal good + necessity
YED < 0
inferior good
X + Y axis on Engel curve (2)
income on Y
quantity demanded on X
YED of necessities (2)
0 < YED < 1 : inelastic YED
consumers will still buy similar amount of necessities even if income increases
YED of luxuries (2)
YED > 1 : elastic YED
consumers will buy more luxuries if income increases
YED of inferior goods (2)
YED < 0 : inelastic YED
consumers will buy less goods if income increases
Engel Curve trend (3)
low incomes = goods are luxuries
as income increases, goods become necessities
high income levels, goods become inferior
How do firms use YED (2)
incomes typically rise during economic growth
firms can see if product is inferior or normal based on YED + predict earnings
How is YED used in economic sectors
changes in income = change output of economy to move towards different sectors
Define Price Elasticity of Supply (PES)
measurement of how much quantity supplied changes in response to a change in price
PES formula
% change in quantity supplied/%change in price
Determinants of PES (5)
time - how long it takes to produce good
flexibility of production - how easily can resources used be changed
unused capacity - can firm easily increase output
storage ability - ability for firm to store stock
rate of production costs - how expensive/scarce are resources
PES of primary commodities (2)
low PES compared to manufactured goods
have high investment + long periods of work
