Price determination in a Competitive Market- Elasticities Flashcards
What is the definition of Price Elasticity of Demand (Ped)
Measures the responsiveness of quantity demanded to changes in price.
What is the equation for Ped?
% ∆ Qd / % ∆ P
Why is Ped always a negative value?
The relationship between price and demand is inverse.
What are the characteristics of elastic demand?
- More responsive to a change in price
- % ∆ Qd > % ∆ P
- The change in Qd/s is proportionally greater than change in P/Y
What are the characteristics of inelastic demand?
- Less responsive to a change in price
- % ∆ Qd < % ∆ P
- The change in Qd/s is proportionally less than change in P/Y
What is there between the sign and the value?
An iron curtain
What is the definition of Yed?
Measures the responsiveness of demand to changes in income.
What is the equation of Yed?
% ∆ D / % ∆ Y
What is the sign for a normal and inferior good for Yed?
+ = normal good
- = inferior good
What is the definition for Cross Elasticity of demand (Xed)?
Measures the responsiveness of demand for one good to changes in the price of another
What is the equation for Xed?
% ∆ D of Good X / % ∆ P of Good Y
What is the sign for a substitute or inferior good?
+ = substitute
- = complement
What is the definition of Price Elasticity of Supply (Pes) ?
Measures the responsiveness of quantity supplied to changes in price.
What is the equation for Pes?
% ∆ Qs / % ∆ P
What are indirect taxes?
Taxes on expenditure/ consumption
How do indirect taxes affect suppliers?
It is physically paid by suppliers which affects their costs of production and therefore affects market supply at each price.
What are the two types of indirect taxes?
- Ad Valorem
- Specific taxes
What are Ad Valorem taxes?
A percentage of the unit cost of a good e.g. VAT
What are specific taxes?
A fixed tax per unit of the good of service produced.
Why impose indirect taxes?
- To raise tax revenue
- To change the level of demand and the pattern of demand of different goods and services.
Why do the government want indirect taxes to change the level of demand?
To deter and reduce consumption of harmful goods and services.
How are taxes shown on PQ graph?
The vertical distance from the new equilibrium to the next curve.
Why do the government want indirect taxes to change the pattern of demand?
To encourage the longer term conservation of scarce economic resources.
