PED Flashcards
PED
a measure of how much the quantity demanded of a good changes when there is a change in its own price
PED formula
%△Qd/%△P
%△Qd
[(Q2−Q1)/Q1]×100
%△P
[(P2−P1)/P1]×100
PED > 1
Price elastic demand, a change in price leads to a proportionately greater change in the quantity demanded.
0 < PED < 1
Price inelastic demand, a change in price leads to a proportionately smaller change in the quantity demanded.
PED = 1
Unitary elastic demand, a change in price leads to a proportionately equal change in the quantity demanded.
PED = 0
Perfectly inelastic demand, a change in price leads to no change in the quantity demanded.
PED = ∞
Perfectly elastic demand, any change in price would lead to an infinite change in the quantity demanded.
draw a price inelastic curve
linear, downwards
draw unitary elastic demand curve
curved, downwards
draw a perfectly inelastic demand curve
y=0, straight line
draw a perfectly elastic demand curve
x=0, straight line
determinants of PED
The number and closeness of substitutes, The degree of necessity and how widely a product is defined, The time period considered, The proportion of income spent on the good
disposable income
The income remaining after deduction of taxes and social security charges, available to be spent or saved as one wishes.
total revenue
The money earned by a firm from selling a good or service; the selling price multiplied by the total quantity sold.
commodities
A commodity is a primary good, and is an important input to production. Oil, iron ore and timber are all examples of commodities.
firms’ total revenue and elasticity
When there is a change in the price of a good or service, the impact on the firm’s total revenue will depend on the price elasticity of demand of the good.
TR1
P1×Q1
TR2
P2×Q2
The change in revenue
TR2−TR1
explain relationship between PED and the slope of the demand curve
…
tax incidence
The burden of tax paid by consumers or producers
who pays more of the tax when PED is inelastic
consumers pay more than producers
who pays more of the tax when PED is elastic
producers pay more than consumers
taxes imposed on elastic PED
demand decreases significantly
taxes imposed on inelastic PED
demand doesn’t change significantly
compare PED of commodities and manufactured goods end explain
PED of commodities is less elastic than one of manufactured goods because commodities are necessities and there are less substitutes for them
volatile
liable to change rapidly and unpredictably , especially for the worse, commodities tend to be more volatile
Income elasticity of demand (YED)
a measure of how much the quantity demanded of a good will change in response to a change in consumers’ incomes
YED=
% change in the quantity demanded of good X / % change in the income (Y) of consumer, %△Qd / %△Y
does a sign in front of YED value matter
YES
what does a positive sign mean
that as incomes increase, quantity demanded of a good increases; and as incomes decrease, quantity demanded decreases (normal goods), upwards linear
what does a negative sign mean
that as incomes increase, quantity demanded of a good decreases; and conversely, as incomes decrease, quantity demanded increases (inferior goods), downwards linear
superior goods
Goods with positive income elastic demand, those with a high price that tend to make up a larger share of a consumer’s income as income rises
YED < –1
YED > 1
income elastic demand, A change in income leads to a proportionately greater change in the quantity demanded.
–1 < YED < 1
income inelastic demand, A change in income leads to a proportionately smaller change in the quantity demanded.
YED = 0
Perfectly income inelastic demand, a change in income leads to no change in the quantity demanded.
(Goods with a positive YED value close to zero are considered necessity goods) y=0
YED=1
no classification, A change in income leads to a proportionately equal change in the quantity demanded
recession
A recession refers to negative economic growth occurring over two or more quarters.
economic recession, if YED>1
the quantity demanded of these goods will increase proportionally more than the increase in income, superior goods
economic recession, YED<1
the quantity demanded of these goods will increase proportionally less than the increase in income, necessities
economic recession, YED<0
likely to experience an increase
primary sector
The sector of an economy that involves extraction of natural resources; agriculture and mining are examples
secondary sector
The sector of an economy where raw materials are combined or changed through manufacturing to make physical products
tertiary sector
The sector of the economy where services are provided to consumers
sectoral change
The change in the structure of the economy to increase or decrease production in one sector or another
Low income countries therefore typically focus output on
primary products
When an economy achieves a high level of national income
consumers will spend disproportionately more in the tertiary sector (even higher YED) than in the primary and secondary sectors
During a recession, will the producer of an inferior good expect sales to increase or decrease?
increase
