PES, YED, XED Flashcards
income elasticity of demand
responsiveness of quantity demanded to a percentage change in the income of consumers
YED equation
(Qn - Qo) x Yo / (Yn - Yo) x Qo
What type of answer do you get for YED?
negative or positive
YED greater than zero
normal good
What are the two subsets of normal goods?
luxury and necessity
YED greater than 1
luxury (or superior good)
What is the one subset of luxuries?
Veblen goods (purchase more when price increases)
YED between 0 and 1
necessity
YED less than zero
inferior good
What is the one subset of inferior goods?
giffen goods (purchase more as price increases)
YED equals zero
consumer is satiated and doesn’t need or desire more of the good
cross price elasticity of demand
measure of the response of quantity demanded of a good to a percentage change in the price of a related good
XED equation
(Q1n - Q1o) x P2o / (P2n - P2o) x Q1o
XED greater than 0
goods are substitutes
XED less than 0
goods are complements
XED equal to 0
goods are not related
price elasticity of supply
measure of a producer’s response to a percentage change in the price recieved for a good/service
PES equation
(Sn - So) x Po / (Pn - Po) x So
PES greater than 1
price elastic
PES less than 1
price inelastic
PES equals 1
unitary price elasticity of supply
Does PES vary along supply curves?
no - all elastic, inelastic or unitary
perfect elasticity of supply
PES = undefined producers willing to produce unlimited supply of good as long as recieve certain price
perfect inelasticity of supply
PES = 0 producer can only supply a finite quantity regardless of price
Graphs for perfect cases of PES?
PES determinants: time period available for production
more time available gives producers more time to search for cheaper substitutes or alternative technology so PES more elastic
PES determinants: existence of spare capacity
factors of production not used most efficiently, easy for producers to increase output quickly so PES more elastic
PES determinants: availability of unsold stocks (inventory)
more goods can easily be supplied to market so PES more elastic
PES determinants: mobility of factors of production
more easily FofP can be moved from production of one good to another, more quickly quantity supplied can increase so PES more elastic
Why does PED change along a demand curve?
- slope of demand curve = changeQ/changeP
- PED = changeQ/changeP * P/Q (or slope * P/Q)
- P/Q varies along a demand curve, so PED changes
