Pack 3: Elasticity Flashcards
What is price elasticity of demand (PED)?
Measures responsiveness of quantity demanded of a product to changes in its price.
What factors influence PED?
~Number of substitutes
~% income spent
~Habit forming good
~necessity of luxury
~Time
~width of market definition
What is inelastic demand?
When there is a less than proportionate change in demand in comparison
What is elastic demand?
When there is a more than proportionate change in demand in comparison
What is perfectly price inelastic demand?
no change in quantity demanded following price change. PED = 0
What is perfectly price elastic demand?
Quantity demanded infinite at given price, no quantity demanded at any other price. PED = infinity
What is unitary elastic demand?
Change in price met with proportionate change in demand. PED = -1
What is total revenue (TR)?
Money earned from selling products. Price x Quantity
What is income elasticity of demand (YED)?
measures responsiveness of quantity demanded of a good to changes in real incomes
What is an inferior good?
Good demanded less as incomes rise. YED is negative
What is a normal good?
Good demanded more as incomes rise. YED is positive
What is a luxury good?
Type of normal good, demand rises/falls more proportionally to change in incomes. YED is above +1
What is the significance of YED for businesses?
Significant effect on profitability of firms, may have to change their production levels or range, to match income levels.
What is cross price elasticity of demand (XED)?
Measures responsiveness of quantity demanded of one good to the change in price of another
What is a substitute good?
Good demanded more when price of related good rises. XED is positive
What is a complementary good?
Good demanded less when price of related good rises. XED is negative
What is an unrelated good?
Demand for one good isn’t affected by the change in price of another. XED = 0
What is the significance of XED for businesses?
Determines demand for their product and so their revenue/profits, will need to make production decisions to respond to demand changes
What is price elasticity of supply?
Measures responsiveness of quantity supplied of a good to changes in price
What is the short run?
Time period where at least one factor of production remains fixed
What is the long run?
Time period where all factors of production can be varied
Will supply be more elastic in the long run or short run?
Long run - takes time to increase supply
What factors influence PES?
~Availability of stockpiles
~Perishability
~State of economy and levels of spare capacity
~Entry of firms into market
~Ease of factor substitution
On an indirect tax with an inelastic demand, who will the larger incidence be on?
The consumers
On a subsidy with an inelastic demand, who will have the larger benefit?
The consumers
