PED AND PES, YED,XED Flashcards
income elasticity of demand (YED)
(YED) measures the responsiveness of quantity demanded to a change in income.
price elasticity of supply (PES)
refers to how responsive quantity supplied is to a change in price
cross elasticity of demand (XED)
measures the responsiveness of quantity demanded for good X following a change in the price of good Y
PES formula
PES =
% Change in Qs / % Change in Price
AND SAY THE REST OUT LOUD
YED formula
YED =
% Change in Qd/ % Change in Y (income)
AND SAY THE REST OUT LOUD
XED formula
XED =
% Change in Quantity Demanded of Good Y÷ % Change in Price of Good X
AND SAY THE REST OUT LOUD!
interpreting PES
ignore the sign
when interpreting PES, we ignore the sign bc there is a positive relationship between quantity supplied and price
interpreting YED
both positive and negative
to interpret YED, remember that normal goods have a positive relationship with income meaning that when income increases, so does demand, whereas with inferior goods, there is a negative relationship with income meaning that when income increases demand for that good decreases.
interpreting XED
XED is used to determine whether goods are substitutes or complements.
A positive XED indicates that the good is a substitute i.e.
a negative XED indicates that the good is a complement.
substitute
if the demand for one product increases when the price of the other goes up.
elastic supply
graph gentle
where the change in quantity supplied is greater than the change in price
PES > 1
inelastic supply
graph steep
where the change in quantity supplied is less than the change in price
PES < 1
unit elastic supply
graph dip
where changes in quantity supplied are equal to changes in price
PES= 1
totally inelastic supply
graph straight down
where supply is completely unresponsive to changes in price
PES= 0
totally elastic supply
graph straight across
where supply is radically responsive to changes in price
PES= infinity
Factors affecting XED
1) if consumers have brand loyalty for a good, then XED for substitute goods r low
2) successful advertising can sway consumers choice by making a brand appear unique, this results in a low XED to OTHER substitutes.
3) if the two goods hv no relationship, then XED= 0
Factors affecting YED
1) the degree of necessity of the good.
2) the rate at which the desire for the good is satisfied as consumption increases.
3) the availability of substitute goods
4) the proportion of income spent on the good or service
5) the level of income of consumers.
Factors affecting PES
1) time- the more time the supplier has, the greater the PES. as if costs of production increase the consumer will have no time to incease production as the producer will not have enough time to arrange more labour and raw materials
**2) the lower the degree of capacity utilisation, the more elastic is supply
- whether it is for the long run or short run, more elastic in short run**
- Gestation period- such as vintage wine, has a gestation period until it can be offered for sale. As it takes a while to ferment, if the price changes quantity supplied cannot change immediately. Things like computer parts hv no gestation period, and their pes is elastic
Factors affecting PED
- Time- as price increases PED tends to be greater as more time elapses
consumer have more time to serach for substitutes - Income, specifically if the proportion of income given up to purchase the good is high then PED is high
- Addiction- the more addictive a product the smaller the PED
Number of substitutes immediately available- the greater numbe rof substitutes available, the higher the PED
