M 5 Flashcards
What is the PED?
It measures the response in quantity demanded to a certain change in price.
How is PED measured ?
% change in QD divided by %change in price
What are the determinate of PED?
Habit forming = inelastic Necessity = ineleastic Luxury = elastic Few substitutes = inelastic Lot of substitutes = elastic Infrequently bought goods = inelastic Frequently bought goods = elastic
what is the IED.
Measures responsiveness of demand to a change in income
How is IED measured
%change in QD divided by income
What is an inferior, normal, unrelated to income good?
Inferior is when the answer is minus 0
Normal is when it’s above 0
Unrelated to income is when it’s 0
What is the CED.
Measures responsiveness of demand of one good to a change in price of a second good
Define the results of CED
Greater than 0= substitute
Less than 0= complements
Equal to 0=unrelated to each other
What is PES
Measures responsiveness in quantity supplied to a certain change in price
What are the determinants of PES
Availability of raw materials
Stock levels
Freedom of entry and exit - void of barriers
Training and technology which make production faster
Time period
What is producer surplus?
Difference between the minimum producers will accept to produce for and the amount they actually get paid/the price. Shown above supply curve and below price
Importance of PED
- International trade: in order to fix prices of goods/services to be exported, it is important to have knowledge about PED.
- Formulation of govt policies: imp for formulating government polices like taxation
- Factor pricing: PED helps in determining price to be paid to the factors in production
- Decision of monopolists: monopolists consider nature of demand while fixing price of his product : elastic - low price, inelastic - high price
