LS12 - Price Elasticity of Demand & Supply Flashcards
What does price elasticity of demand do?
Measures responsiveness of demand given a chnage in price
What happens a product is price elastic?
A change in price causes a larger change in demand
What happens when a product is price inelastic?
Change in price causes a smaller change in demand
What are the determinants of price elasticity of demand?
Number of substitutes
Necessity or Luxury
Addictiveness
Time
Proportion of income on the product
How does the number of substitutes affect price elasticity of demand?
More substitutes = wider choice = more price elastic
How does necessity/luxury affect price elasticity of demand?
If product = necessity, product is price inelastic
People will still buy the product regardless of price
How does addictiveness affect price elasticity of demand?
More addictive = more price inelastic
Price won’t have much of an effect
How does time affect price elasticity of demand?
More time consumers have to decide = more price elastic
Consumer will try to make the best decision possible if given more time
How does proportion of income affect price elasticity of demand?
Higher proportion of income = more elastic
Buyer will spend more time deciding how to use their income if product takes up higher propitious of income
What is the formula for price elasticity of demand?
% change in quantity demanded
————————————————
% change in price
What is the formula for percentage change?
New - old
————— x 100
Old
What must price elasticity of demand always be rounded to?
2DP
What is the PED value for a product with elastic demand?
1+
What is the PED value for a product with inelastic demand?
Between 0 & 1
What is the PED value for a product with unitary demand?
1
What is the PED value for a product with perfectly elastic demand?
0
What is the PED value for a product with a “higher” elastic demand?
The higher the PED value, the more elastic the demand
What is the PED value for a product with a “more”inelastic demand?
Lower the number between 0 and 1, the more inelastic it is
What does price elasticity of supply do?
Measures responsiveness of supply given a change in price
What causes elastic supply?
A change in price causes a larger change in supply
What causes inelastic supply?
A change in price causes a smaller change in supply
What are the determinants of price elasticity of supply?
Time required to make product
Level of spare capacity
Number of finished goods/stock available
Time period
Perishability of product
How does time required to make the product affect price elasticity of supply?
More time to make product = more price elastic
Firm won’t be able to respond as quickly to a change in price
How does level of spare capacity affect price elasticity of supply?
More spare capacity = more elastic supply
Firm can respond by easily increasing capacity
How does number of stock/finished goods affect price elasticity of supply?
More stock = higher elasticity
The firm can easily respond by releasing more or less stock
How does time affect price elasticity of supply?
More time = more price elastic
Firm can respond better over larger time as it gives the opportunity for the firm to expand/reduce production
How does the perishability of the product affect price elasticity of supply?
More perishable = more inelastic
More perishable = more difficult to built up stock = harder to respond to change in price
How is the information for working out price elasticity of supply and price elasticity of demand similar?
Same equations and information apply to both but instead of quantity demanded, its quantity supplied
