micro 2.5/ 2.6- elasticities of demand/supply Flashcards
Define elasticity
elasticity shows how sensitive/responsive one variable is to another
Define PED, or Price Elasticity of Demand.
PED measures the responsiveness of Qd (quantity demanded) due to changes in price.
Describe the diagram for a highly responsive or elastic good.
The slope/gradient will be flatter
Describe the diagram for a less responsive or inelastic good.
The slope/gradient will be steeper
State the formula for PED
PED= percentage change in Qd/percentage change in price
PED will always have a ——– value due to the ——–.
PED will always have a negative value due to the law of demand.
What is the rule for categorising PED?
Use the absolute value of the PED, ignoring the minus sign.
State the 5 ranges of PED
- inelastic
- elastic
- perfectly inelastic
- perfectly elastic
- unitary elastic
Describe an inelastic PED
- when (the Qd of) something is not very responsive (to changes in price).
- 0<|PED|<1
- %∆P>%∆Qd
- gradient of demand curve steeper
Describe an elastic PED
- when (the Qd of) something is very responsive (to changes in price).
- |PED|>1
- %∆P<%∆Qd
- gradient of demand curve flatter
Describe a perfectly inelastic PED
- vertical demand curve
- PED=0
- Qd does not respond to changes in P
Give an example of where a perfectly inelastic PED may occur
An essential medicine with no substitutes.
Describe a perfectly elastic PED
- horizontal demand curve
- PED= ∞
- Qd is entirely dependent on P (buyers will only buy at one price and no other)
Give an example of where a perfectly elastic PED may occur
very theoretical, but luxury products like high end cars
Describe a unitary elastic PED
- hyperbola demand curve
- |PED|=1
- %ΔP=%ΔQd
effect of a PED determinant on a demand graph
affects the slope of the curve
state the 4 PED determinants
- number and closeness of substitutes
- Degree of necessity
- proportion of income spent on good
- time
(never deprive people of time)
Describe number and closeness of substitutes as a PED determinant
- many and close substitutes= elastic (consumer can switch to other substitutes easily)
- few/remote substitutes= inelastic (consumers do not have as many options)
Describe degree of necessity as a PED determinant and give examples
- necessity= inelastic (eg medicine, food, water)
- luxury= elastic (eg holidays abroad, high end cars)
Describe proportion of income spent on a good as a PED determinant
- small proportion (cheap)= inelastic as disposable income Yd is not affected significantly
- large proportion (expensive)= elastic as disposable income Yd is affected significantly
Describe time as a PED determinant
- short term= inelastic (less time to change buying habits)
- long term= elastic (more time to change buying habits)
give an example of time as a PED determinant
if the price of petrol rises, in the short term there are limited things that you can do/choices, but in the long term consumers can exchange their big, highly consuming cars (eg jeeps) for smaller, less consuming cars (eg electric)
give the formula for total revenue
TR= no. of goods sold x price of goods sold
Describe relationship between PED and total revenue
If demand is price inelastic, total revenue will move in the direction of the price change.
If demand is price elastic, total revenue will move in the opposite direction to the price change.
Give 3 uses of PED for firms/governments
- pricing policies
- to determine tax burden (consumer/producer burden)
- to price discriminate
Describe the use of PED for firms
For pricing policies; knowledge of PED helps determine if they need to increase or decrease their prices in order to maximise revenue
- elastic good (%∆P<%∆Qd): prices should decrease
- inelastic (%∆P>%∆Qd): prices should increase
Define YED, or income elasticity of demand
YED measures the responsiveness of the Qd of a good due to changes in income
Give the formula for YED, or income elasticity of demand
YED= %ΔQd/%ΔY
Give the range of values for the YED of an inferior good
YED<0; as income increases, demand for the good decreases
Give the range of values for the YED of a normal good
YED>0; as income increases, demand for the good also increases.
Define income inelastic goods
- 0<YED<1
- %ΔY>%ΔQd
- eg necessities
Define income elastic goods
- YED>1
- %ΔY<%ΔQd
- eg luxuries
Describe YED curves for normal goods, both elastic and inelastic
- Income (Y) on y axis, quantity on x axis
- upward sloping curve
- income inelastic= steep gradient
- income elastic= flatter gradient
describe and draw an Engel curve
- as Y increases, Qd increases- good acts as a NORMAL good, so YED>0
- people don’t want to buy more of the good despite being able to, they have the max amount they want- good becomes perfectly inelastic, so YED=0
- The good is ‘beneath’ consumers- becomes inferior, so YED<0
define PES, or price elasticity of supply
PES measures the responsiveness of Qs to changes in price
what range of values must PES always be?
PES is always positive
state the 5 ranges of PES
- inelastic
- elastic
- perfectly inelastic
- perfectly elastic
- unitary elastic
give the formula for PES
PED= percentage change in Qs/percentage change in price
describe an elastic PES
- supply can change quickly as good is easily produced
- PES>1
- %ΔP<%ΔQs
- flatter supply curve
describe an inelastic PES
- supply can’t change quickly as good is not easily produced
- 0<PES<1
- %ΔP>%ΔQs
- steeper supply curve
describe a perfectly inelastic PES
- vertical supply curve
- PES= 0
- Qs not affected by changes in price
state 3 possible causes of a perfectly inelastic PES
- immediate time (make more food NOW)
- fixed quantity of the good supplied now (eg theatre/stadium seats)
- fixed quantity and no possibility of producing more (eg original artwork)
describe a perfectly elastic PES
- horizontal supply curve
- PES= ∞
- Qs is entirely dependent on P (producers will only make at one price and no other)
give a possible cause of a perfectly elastic PES
infinite global supply of a product
describe a unitary elastic PES
- PES=1
-%ΔP=%ΔQs - straight supply line that goes through the origin
state 5 PES determinants
- time
- mobility of factors of production
- unused capacity
- ability to store
- rate at which costs increase
describe time as a PES determinant
- immediate time: all FOPs are fixed, so supply is perfectly inelastic
- short run: some FOPs are fixed, so supply is inelastic
- long run: all FOPs are variable, so supply is very elastic
describe mobility of FOPs as a PES determinant
- higher mobility → more elastic (easier to change to another production with less costs when price rises)
- lower mobility → less elastic (harder to change to another production with less costs when price rises)
describe unused capacity as a PES determinant
- full capacity: inelastic as time is needed to buy new machines
- excess capacity: elastic as you can just start using the unused machines
describe ability to store as a PES determinant
- low ability: inelastic- can’t release stocks in market if demand increases suddenly
- high ability: elastic- you can release stocks if necessary
describe rate at which costs increase as a PES
lower rate= more elastic as firms have a longer period of time to adjust and respond
higher rate= less elastic as firms have less time to adjust and respond
