lesson 10- elasticity Flashcards
what is elasticity?
a measure of the extent to which a quantity responds to a change in price
what is elastic price elasticity of demand
the % change in demand is greater than the % change in price
PED>1
what is inelastic price elasticity of demand
the % change in demand is less than the % change in price
PED<1
what is the PED formula?
+rules
PED=(%change in demand)/(%change in price)
-always negative
if PED
=0-perfectly inelastic
=0<1-inelastic
=1-unitary
=>1-elatic
what are the determinants of PED?
Substitutes
Percentage of income
Luxury goods
Addiction
Time
draw perfectly elastic demand
horizontal demand line
-as a change in price results in no demand at all
draw perfectly inelastic demand
vertical lime
-if price changes, quantity demanded doesnt change
draw relatively inelastic demand
steeply sloped- google
-if price changes quantity demanded barely changes
draw relatively elastic demand
shallow/ not steep slope
-as price changes, quantity demanded changes by more
draw unitary demand
change in price is equal to change in demand
what happens to the revenue produced by an inelastic good as price increases
revenue increases
what happens to the revenue produced by an inelastic good as price decreases
revenue decreases
what happens to the revenue produced by an elastic good as price increases
revenue decreases
what happens to the revenue produced by an elastic good as price decreases
revenue increases
what is income elasticity
the responsiveness of demand to a change in income
YED
what is the formula of YED?
YED= (%change in demand)/(%change in income)
what happens to demand of a normal good as income increases
demand increases
YED is positive
what happens to demand of a inferior good as income increases
demand decreases
YED is negative
what type of good has a YED of (1.3)
elastic as above 1
inferior as negative
what type of good has a YED of 0.6
inelastic as below 1
normal as positive
what is cross elasticity
responsiveness of demand of one good after a change in price of another good
XED
what is the formula for XED
XED= (%change in quantity demanded of good A)/ (%change in price of good B)
what type of correlation is it if XED= positive
substitute
-good As price increases, good Bs demand increases
what type of correlation is it if XED= negative
compliment
good B price decreases
good A demand down
what happens when XED=1
the products are perfectly close to each other
closer to1, the closer the products are
