LS12 Flashcards
What is price elasticity of demand?
A measure of the responsiveness of demand given a change in price
When is demand price elastic and inelastic?
Price elastic when a change in price causes a proportionally larger change in demand
Price inelastic when a change in price causes a proportionally smaller change in demand
What are the determinants of PED?
Number of substitutes: more substitutes means greater degree of customer switching when there is a price change
If it is a necessity: demand is inelastic if it is a necessity
Addictiveness: more addictive means price inelastic as people will buy no matter what
Time: more time means consumers have more time to find cheaper substitutes so more price elastic
Proportion of income spent on product: higher proportion of income spend means demand is more price elastic because people cannot afford to spend more
What is the formula for elasticity?
%change in quantity demanded/supplied/%chance in price
Change= new-original/original
What does it mean if the ped value is over, = or under 1?
Between 0 and 1 means inelastic
1 means unitary
Over 1 means elastic
0 means perfectly elastic
What is price elasticity of supply?
A measure of the responsiveness of supply to a change in price
When is supply price elastic or inelastic?
Supply is price elastic if a change in price causes a proportionally larger change in supply
Supply is inelastic(steeper) if a change in price causes a proportionally smaller change in supply
What are the determinants of PES?
Time required to produce good: more time required means price inelastic as firms cannot respond quickly to price changes
Level of spare capacity: more spare capacity means more elastic supply as factors of production are more available
Stock of goods available: more stock available means price is elastic because firms can respond quickly to price changes by releasing more or less stock
Perishability: more perishable means less elastic supply as it is hard to build a stock
