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Theme 1 - Micro > LS12 - Price Elasticity of Demand & Supply > Flashcards

LS12 - Price Elasticity of Demand & Supply Flashcards

1
Q

What does price elasticity of demand do?

A

Measures responsiveness of demand given a chnage in price

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2
Q

What happens a product is price elastic?

A

A change in price causes a larger change in demand

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3
Q

What happens when a product is price inelastic?

A

Change in price causes a smaller change in demand

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4
Q

What are the determinants of price elasticity of demand?

A

Number of substitutes

Necessity or Luxury

Addictiveness

Time

Proportion of income on the product

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5
Q

How does the number of substitutes affect price elasticity of demand?

A

More substitutes = wider choice = more price elastic

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6
Q

How does necessity/luxury affect price elasticity of demand?

A

If product = necessity, product is price inelastic
People will still buy the product regardless of price

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7
Q

How does addictiveness affect price elasticity of demand?

A

More addictive = more price inelastic
Price won’t have much of an effect

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8
Q

How does time affect price elasticity of demand?

A

More time consumers have to decide = more price elastic

Consumer will try to make the best decision possible if given more time

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9
Q

How does proportion of income affect price elasticity of demand?

A

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

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10
Q

What is the formula for price elasticity of demand?

A

% change in quantity demanded
————————————————
% change in price

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11
Q

What is the formula for percentage change?

A

New - old
————— x 100
Old

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12
Q

What must price elasticity of demand always be rounded to?

A

2DP

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13
Q

What is the PED value for a product with elastic demand?

A

1+

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14
Q

What is the PED value for a product with inelastic demand?

A

Between 0 & 1

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15
Q

What is the PED value for a product with unitary demand?

A

1

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16
Q

What is the PED value for a product with perfectly elastic demand?

A

0

17
Q

What is the PED value for a product with a “higher” elastic demand?

A

The higher the PED value, the more elastic the demand

18
Q

What is the PED value for a product with a “more”inelastic demand?

A

Lower the number between 0 and 1, the more inelastic it is

19
Q

What does price elasticity of supply do?

A

Measures responsiveness of supply given a change in price

20
Q

What causes elastic supply?

A

A change in price causes a larger change in supply

21
Q

What causes inelastic supply?

A

A change in price causes a smaller change in supply

22
Q

What are the determinants of price elasticity of supply?

A

Time required to make product

Level of spare capacity

Number of finished goods/stock available

Time period

Perishability of product

23
Q

How does time required to make the product affect price elasticity of supply?

A

More time to make product = more price elastic

Firm won’t be able to respond as quickly to a change in price

24
Q

How does level of spare capacity affect price elasticity of supply?

A

More spare capacity = more elastic supply

Firm can respond by easily increasing capacity

25
Q

How does number of stock/finished goods affect price elasticity of supply?

A

More stock = higher elasticity

The firm can easily respond by releasing more or less stock

26
Q

How does time affect price elasticity of supply?

A

More time = more price elastic

Firm can respond better over larger time as it gives the opportunity for the firm to expand/reduce production

27
Q

How does the perishability of the product affect price elasticity of supply?

A

More perishable = more inelastic

More perishable = more difficult to built up stock = harder to respond to change in price

28
Q

How is the information for working out price elasticity of supply and price elasticity of demand similar?

A

Same equations and information apply to both but instead of quantity demanded, its quantity supplied

Theme 1 - Micro (12 decks)

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