Micro Elasticities Flashcards
What is PED
Price elasticity of demand - The responsiveness of demand to a change in the price of the good
The values are always negative but economists write them as positive
What is the equation for PED
What is unitary elastic PED
PED = 1
Quantity demanded changes by the exactly the same percentagae as price
Elastic PED
PED>1
Quantity demanded changes by a larger percentage than price so demadn is relatively responsive to price
Inelastic PED
0<PED<1
Quantity demadned changes by a smaller percentage than price so demand is relatively unresponsive to price
Factors affecting PED
- **Availabiltiy of subsitutes ** - If a product has a lot of subsitutes people will switch to other products when prices go up. If there are subsitues than PED will be elastic. If not then it will be inelastic as consumers will have no other choices than to buy the only option
- Time - The longer the time. the easierit will be for a person to find an alternative product/supplier of the product so the more elastic. In the short term many goods are inelastic as people may not even notice the price difference
- Necessity - If you need something, the demadn curve will be inelastic because even if the price goes up, you still need to buy it
- How large of a % of total expenditure - If a good/service represents a very small percentage of a person’s expenditure, a significant increase in price will have a relatively small impact on how much they buy of that product so it will be inelastic
- Addictive - If a product is addictive, then the demand curve will inelastic. No matter how high prices are, people will still buy the good to furfill their addiction
Why is PED Significant
- The price elasticity of demand, along with the price elasticity of supply, deterimine the effects of the imposition of indirect taxes and subsidies
- The more elastic the demand curve, the lower the incidence of tax on the consumer. This means that when PED is elastic, a tax will only lead to a small increase in price and the supplier will have to cover the majority of the cost of the tax
- When demand is inelastic, the tax will be mainly passed onto the consumer. Since consumers are relatively unresponsive to the price of this good, quantity demadned will nto fall by a large amount. This means that the tax will be ineffective at reducing output. However, it also measn that there is a high tax revenue for the government. The more inelastic the demand curve, the higher the tax revenue for the government
PED and revenue
Elastic - Price and revenue have an inverse relationship. So if price increases then revenue will decrease and vice versa
Inelastic - Direct relationship. If price increases then so does revenue and vice versa
Unitary - Changes in price don’t affect total revenue
YED - equation and definition
The responsiveness of demand to a change in income
Values for YED
YED can take any value
YED<0 - Inferior good, so a rise in income will lead to a fall in demand for the good
0<YED - Normal good, a rise in income will lead to a rise in demand for the good
1<YED - Luxary good, it is a type of normal good
Significance of YED
- It is important for businesses to know how their sales will be affected by changes in the income of the population. if the economy is improving and people’s incomes are rising it is vital that a business knows whether this is likely to increase their sales or not
- It may have an impact on the types of goods that a firm produces. During times of prosperity firms might produce more luxary goods and less inferior goods
XED - definition and equation
The responsiveness of demadn for one product (A) to the change in the price of another product (B)
Values for XED
XED can take any value
XED>0 - Subsitutes, an increase in the price of good B will increase demadn for good A. Such as Coke and Pepsi
XED<0 - Complementary goods, an increase in the price of good B will decrease demadn for good A. Such as DVDs and DVD players
XED = 0 - Unrelated goods, a change in price of good B has no impact on good A
The larger the integer the stronger the relationship between the two
Significance of XED
Firms need to be aware of their competition and those producing complementary goods. They need to know how price changes by other firms will impact them so they can take appropriate action
PES - definition and equation
The responsiveness of supply to a change in price of the good
Values for PES
PES is always positive
0<PES<1 - Inelastic PES, the quantity supplied changes by a smaller percentage than price so supply is relatively unresponsive to price. The curve will be steep starting on the x axis
1<PES<∞ - Elastic PES, the quantity supplied changes by a larger percentage than price so supply is relatively responsive to price. The curve will be more sloping starting on the y axis
PES = 1 - Unitary PES, quanitty supplied changes by exactly the same percentage as price. This would be shown as a curve which starts in the origin, is steeper than an elastic curve but more sloping than an inelastic curve
S1 - Unitary
S2 - Elastic
S3 - Inelastic
