lesson 9 Flashcards
what is revenue?
the total amount of income generated by the sale of goods and services
the money coming in
equation for revenue
price times quantity
what does the elasticity of demand show?
(not what PED is but what does it show happening to the change in demand)
how sensitive demand is
what is PED?
price elasticity of demand measures a consumers responsiveness to a change in a goods own price
firms are very interested in what happens to demand for their products should the price change
characteristics of an elastic change
sensitive
big
noticeable
even with a small price change there will be a large change in demand meaning there are substitutes available
characteristics of an inelastic change
insensitive
not much changes
if a change in price were to be matched by an exactly proportionate change in demand, demand would not be elastic or inelastic it would be…
unitary
PED equation
% change in quantity demanded
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% change in price
when calculating PED is it always positive or negative?
negative
(demand curve has a negative relationship with price)
numerically how do we know is PED is insensitive?
if its less than one
numerically how do we know is PED is sensitive?
if its more than one
four reasons why elasticity varies
- substitutability
- percentage of income used
- time
- width of market
in terms of elasticity what does substitutability impact?
if there is choices, so close substitutes, it will lead to an elastic demand in our own good as people are able to find cheaper alternatives
in terms of elasticity what does percentage of impact used influence?
expensive goods that take up a lot of your income will tend to be more elastic
in terms of elasticity what does time impact?
demand for goods and services is more elastic in the long run than in the short run because it takes time to respond to a price change
why do firms hate elastic demand?
implies that customers have choices and will leave if they raise prices too high
if firms have inelastic demand its good because…
they can raise prices without losing customers and with the rising prices their total revenue also increases
high season chain of rewasoning with demand
high season —> inelastic demand —> put up prices
low season chain of reasoning with demand
low season —> elastic demand —> put prices down as it is now in the hands of the consumers as they have CHOICES
what is the best thing to do when demand is elastic?
cut prices to boost demand and total revenue
what does it mean if a firm differentiates their product from the competition?
brand loyalty
how can a firm increase demand for their product?
changing the prices
updating the product
increasing the quality of the product
promotions
place (where they put them)
what is creative destruction?
new product destroys demand for other products
if demand is elastic and price falls what happens?
price falls
demand increases
total revenue increases
if demand is inelastic and price falls what happens?
price falls
demand decreases
total revenue decreases
if demand is elastic and price rises what happens?
price rises
demand falls
total revenue increases
if demand is inelastic and price rises what happens?
prices rises
demand falls
total revenue rises
in an economy its only productive when?
it is operating on its production possibility curve
what is likely to happen when money is used as a medium of exchange?
trade is likely to increase
