Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Economic IB 1 > Income Elasticities of Demand + PES of Supply > Flashcards

Income Elasticities of Demand + PES of Supply Flashcards

1
Q

Explain the concept of Income of Elasticity of Demand (YED)

A
  • Measure of responsiveness of demand to changes in income
  • Y = income
  • Provides info on how much demand would change and the direction where demand curve will shift.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Outline the YED formula

A

YED = % Change in Quantity / % Change in Income
((final - initial)/100)/((final - initial)/100)

Basically PED but replace % Change in price but with % change in income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

How do you interpet YED

A

Positive value (YED > 0): normal good
- Basically the quantity changed a lot

Negative value (YED < 0): inferior good
- Opposite

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Interpretation of YED values

A

Normal good = YED between 0 and 1
- increased income increased demand
- necessities
- income inelastic

Luxury good ( YED is greater than 1)

  • ^ income = ^ demand bigger than increased income

Inferior good ( YED < 0 )

  • ^ income = v demand
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What determines what is a normal good (necessity?) and a luxury good

A

Through income, meaning it is relative
- Luxury good is a type of normal good
-> Extremely relative (e.g. rich vs poor ppl — poor ppl consider things like sodas luxuries)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Describe the movement along the Engel Curve

A

Going back (D -> E) = negative, inferior good, YED < 1
- it resembles the demand curve in the market equilibrium diagrams because, for inferior good YED, the inverse relationship of income and demand

Moving vertically but no change in x axis (C -> D): YED = 0

Moving forward and upwards (A -> B or C): YED > 0

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Engel curve for Inferior Goods

A

Because of the inverse relationship of income to the demand for inferior goods, the arrows (dictating the change in quantity demand and price)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Explain the Engel Curve for Normal Goods when they’re Income Inelastic

A

(small % change in demand to % change in income)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What does the term “inferior goods” refer to?

A

The term ‘inferior goods’ refers to affordability rather than quality (even though some inferior goods may really be of lower quality)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Explain the Engel Curve for Normal Goods when they’re Income Elastic/Luxury Goods

A

All luxury goods are very income elastic normal goods (but not all income elastic normal goods are luxury goods)
-> % Change in Demand > % Change in price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

How does the demand curve shift on terms of YED?

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Can YED be negative in the value and in interpretation?

A

Yes. For inferior goods

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is the difference between an Engle Curve and a demand curve?

A

Engle curve = income as y axis and demand as x-axis

Demand curve = price as y-axis and demand as x

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Why are necessities income inelastic normal goods?

A

Income elastic because:
- Even if the income rises or not, people still need necessities to live

Normal good as:
- ^ Income = ^ Demand.

that’s why its / shape :)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is the formula for the PES

A

PES = % Change in Quantity supply/ % Change in price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

When is supply price elastic?/ What do we mean by supply price elastic

A

Can increase/change the quantity supplied even if the price changes, able to respond to higher market prices

17
Q

When is supply price inelastic

A

-> Cannot change quantity supplied in a short period of time according to a change in market price.

  • e.g.: houses’ supply are price inelastic as it is not easy to produce more houses (change in quantity demand) in order to meet the change in price.
18
Q

Outline the degrees of PES

A

0 < PES < 1 = inelastic supply

1 < PES < Infinity = elastic supply

Special cases

PES = 1 = unit elastic (Change in supply = change in price)

PES = 0 = quantity supplied is completely unresponsive to a change in price (no matter how much the price changes, the product cannot be produced anymore e.g. paintings of Van Gogh)

PES = infinity = perfectly elastic supply

19
Q

Explain perfect price elasticity on terms of supply

A

Incredibly responsive to change in price because the quantity supply of the product can be changed (i.e. produce more or less) in a short period of time to accommodate the change in price.

20
Q

What type of PES is this?

A

Price inelastic supply

(e.g. fruits and vegetables, houses/buildings, just anything that couldn’t be mass-produced)

21
Q

Define PES

A

measures the responsiveness of quantity supplied to a change in price.

(refer to the law of supply, ceteris paribus)

22
Q

What type of PES is this?

A

Perfectly price inelastic supply
- meaning that the change in price has no impact over the change of quantity supply (meaning that the firm cannot change the output/quantity supply)
- e.g. football stadiums or performance halls, tickets, limited edition items

23
Q

What type of PES is this?

A

Price elastic supply
- the supply is responsive to the change in price or the price impacts the Qs (meaning the firm can produce more or less)

24
Q

What type of PES is this?

A

Perfectly price elastic supply
- theoretical as the firm can change their Qs infinitely aka they have the capability (e.g. infinite resources) to change their supply infinitely

25
Q

What type of PES is this?

A

Unitary price elastic supply
- it means that S1, S2 and S3 has the same percentage proportion (so I think PES) of quantity supply to change in price.

e.g. S1, S2 and S3 = 30.
-> there are only three lines there to depict that no matter how much the curves shift, that proportion would stay the same.

26
Q

Does unit elastic (for YED, PES and PED) mean that the change in price is equal to the change in quantity? (ASK SIR)

A

Yes. It does and no matter how the curve shifts the PED, YED and PES would always stay the same because they’re always equal to one.

e.g.: Change in Quantity = 1, Change in Price = 1
1/1 = 1

27
Q

Explain the PES determinant of time period on terms of short run and the long run

A

Short-run:
Depends on how fast the good/service can be manufactured)

v time = ^ price elastic supply - for faster (short run products)

(i.e. more things can be produced in a short period of time)
e.g.: milking a cow = ^ PES than getting meat

The long run:
Can generally apply to many, if not, all products.

firms can adjust their production levels more
^ PES = ^ time

28
Q

Explain the PES determinant of mobility of factors in production

A
  • Mobility of the factors of production = level of ease and cost of FoP substitution (e.g. replacing labor for capital, switching from carrots to apples)
  • if some resources are not replaceable, the PES would be relatively inelastic

^ PES = ^ Mobility

29
Q

Define factor mobility

A

Factor mobility is the the extent on how replaceable or how one could alternate between uses with no loss of efficiency

30
Q

Explain the PES determinant of unused capacity

A

Define Unused capacity = degree of spare productive capacity (e.g. able to produce 500 bottles, but only produce 200 because of market price)

  • spare productive capacity = unused FoPs = able but not currently making their maximum capacity would allow them

^ PES = ^ unused capacity

31
Q

Explain the PES determinant of ability to store

A

^ PES = ^ Inventory (e.g. being non-perishable, having appropriate storage facilities for FoPs’ longevity)

  • ## can respond quickly to change in market prices (increase)e.g.: Because of this canned meats are more PES compared to fresh meat (because fresh meat is perishable)
32
Q

Explain the PES determinant of the rate at which costs increase to store (EDIT ??)

A
  • Rate of costs of storage adds to the production costs
  • Due to the law of marginal returns: MC of production will rise after a certain point of output due to MC of FoPs becoming more expensive to use. Therefore in order to get returns for the MC, the firms must sell their supply when the market price is greater than their MC

Therefore:

v PES if price is below the MC (and related, if the rate ^)

^ PES if price is above the MC

33
Q

Differentiate short run and long run

A

Short run: the period during which some inputs are fixed while others are variable.
Long Run: is the period during which all inputs are variable.

basically variable = inputs/FoPs that can change in general (in quantity, in use, quality, etc.)
fixed = the opposite

Economic IB 1 (8 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions