Price elasticities of demand Flashcards
what is price elasticity of demand
measures the responsiveness of demand as a result of a change in price
how to calculate ped
% change in QD/ %change in p
quaking ducks on a pond
what does it mean when a the demand for a product is price elastic
it means demand changes a lot as a result in a change in price
Characteristics of an elastic good
lots of substitutes
what does it mean when the ped is 1 or more
the demand for the good is elastic
what does it mean when the ped is less than 1
the demand for the good is inelastic
3 characteristics of an inelastic good
- It is a necessity
- lack of substitutes
- they have addictive features such as cigarettes
why may a government chose to tax an inelastic good
to increase tax revenue as consumers are willing to pay higher prices and endure the tax burden
what is the problem with government taxing inelastic goods such a cigarettes
it is a regressive tax and will greater impact those on lower incomes the taxed good takes a greater proportion of their income and the family may suffer from food poverty as a result
how much revenue does the government gain from cigarette taxes
10 billion per year
can be reinvested into educations to provide young children with information and the negative side effects which may make them less likely to smoke.
this may hypothecate the externality
what is price elasticity of supply
Measures responsiveness of changes in quantity supplied as a result of changes in price
demand
the quantity of a good or service consumers are willing to buy at a given price rate in a given time period
non price determinants of demand
- price of substitutes and compliments
- income (interest)
- changes in taste and advertising
ceteris parabus
all other things being equal
EQ an outward shift in demand will result in a rise in prise and an increased quantity supplied (assuming ceteris paribus)
supply
the quantity of goods a services firms are willing and able to produce at a given price
non price determinants of supply
- productivity (output per worker/capital)
- taxes/ subsidy
- cost of factors of production such as oil prices
- weather
how to calculate price elasticity of supply
%change in QS/ %change in Price
Quaking sharks on a pond
why may some firms have an inelastic supply curve
- firms have low levels of stock
- if its difficult to increase production as cost of labour is expensive
- eg agricultural products take time to grow and less able to adjust to demand
income elasticity of demand
measures the responsiveness of demand as a result in a change in income
income elasticity of demand calculation
% change in income/ % change in income
quaking ducks on ice
what is composite demand
Composite demand happens when goods or services have more than one use so that an increase in the demand for one product leads to a fall in supply of the other. E.g. milk which can be used for cheese, yoghurts, cream, butter and other products.
what does the existence of scarcity in the economy imply
that individuals must make a choice
what is an economic good
good or service that has a benefit (utility) to society. Also, economic goods have a degree of scarcity and therefore an opportunity cost
why is choice part of the economic problem
because it involves opportunity cost
what is the demand curve drawn on the assumption
Factors affecting demand, other than price, remain constant.
what ped does a normal good have
a positive figure that is less that one
what ped does an inelastic good have
a value smaller than one (eg 0.5)
what ped does an elastic good have
a value greater than one (eg 6)
what does it mean when ped is 0
perfectly inelastic
what does unitary elastic mean
a change in price results in an equally proportional change in another demand.
(when PED=1)
what may happen to revenue if a firm with and inelastic demand increases its prices
revenue is likely to increse
what is cross elasticity of demand
Cross elasticity of demand (XED) measures the percentage change in quantity demand for a good after a change in the price of another
how to calculate cross elasticity of demand
the change in quantity demanded of good A/ the change in price of good B
how can XED help firms
- if there are no substitutes firms can price their product higher
- loss leaders- For example, many companies sell printers as cheaply as possible because if they sell a printer, they know the demand for their replacement ink cartridges will increase.
what does an XED greater than one mean
strong complements/ substitutes and changes in a price of one good may result in strong changes in QD of another good
why may supply be elastic
If there is spare capacity in the factory.
If it is easy to employ more factors of production.
for example in the taxi market it is easy to increase supply as the barriers to entry is only as drivers license. so therefore workers can be relatively low skilled and can be employed quickly to match changes in price
what does a pes of 0 mean
perfectly inelastic
what does a pes of infinity means
perfectly elastic
demand
the number of consumers willing and able to buy a good or service at a given price
supply
the amount of goods that suppliers are willing and able to sell at a given price
Where is the point of revenue maximisation
where the curve is unitary elastic
what is the minimum efficient scale
where average costs can’t be lowered anymore
