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micro Economics > Price elasticities of demand > Flashcards

Price elasticities of demand Flashcards

1
Q

what is price elasticity of demand

A

measures the responsiveness of demand as a result of a change in price

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2
Q

how to calculate ped

A

% change in QD/ %change in p
quaking ducks on a pond

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3
Q

what does it mean when a the demand for a product is price elastic

A

it means demand changes a lot as a result in a change in price

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4
Q

Characteristics of an elastic good

A

lots of substitutes

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5
Q

what does it mean when the ped is 1 or more

A

the demand for the good is elastic

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6
Q

what does it mean when the ped is less than 1

A

the demand for the good is inelastic

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7
Q

3 characteristics of an inelastic good

A
  1. It is a necessity
  2. lack of substitutes
  3. they have addictive features such as cigarettes
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8
Q

why may a government chose to tax an inelastic good

A

to increase tax revenue as consumers are willing to pay higher prices and endure the tax burden

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9
Q

what is the problem with government taxing inelastic goods such a cigarettes

A

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

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10
Q

how much revenue does the government gain from cigarette taxes

A

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

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11
Q

what is price elasticity of supply

A

Measures responsiveness of changes in quantity supplied as a result of changes in price

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12
Q

demand

A

the quantity of a good or service consumers are willing to buy at a given price rate in a given time period

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13
Q

non price determinants of demand

A
  1. price of substitutes and compliments
  2. income (interest)
  3. changes in taste and advertising
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14
Q

ceteris parabus

A

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)

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15
Q

supply

A

the quantity of goods a services firms are willing and able to produce at a given price

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16
Q

non price determinants of supply

A
  1. productivity (output per worker/capital)
  2. taxes/ subsidy
  3. cost of factors of production such as oil prices
  4. weather
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17
Q

how to calculate price elasticity of supply

A

%change in QS/ %change in Price

Quaking sharks on a pond

18
Q

why may some firms have an inelastic supply curve

A
  1. firms have low levels of stock
  2. if its difficult to increase production as cost of labour is expensive
  3. eg agricultural products take time to grow and less able to adjust to demand
19
Q

income elasticity of demand

A

measures the responsiveness of demand as a result in a change in income

20
Q

income elasticity of demand calculation

A

% change in income/ % change in income

quaking ducks on ice

21
Q

what is composite demand

A

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.

22
Q

what does the existence of scarcity in the economy imply

A

that individuals must make a choice

23
Q

what is an economic good

A

good or service that has a benefit (utility) to society. Also, economic goods have a degree of scarcity and therefore an opportunity cost

24
Q

why is choice part of the economic problem

A

because it involves opportunity cost

25
Q

what is the demand curve drawn on the assumption

A

Factors affecting demand, other than price, remain constant.

26
Q

what ped does a normal good have

A

a positive figure that is less that one

27
Q

what ped does an inelastic good have

A

a value smaller than one (eg 0.5)

28
Q

what ped does an elastic good have

A

a value greater than one (eg 6)

29
Q

what does it mean when ped is 0

A

perfectly inelastic

30
Q

what does unitary elastic mean

A

a change in price results in an equally proportional change in another demand.

(when PED=1)

31
Q

what may happen to revenue if a firm with and inelastic demand increases its prices

A

revenue is likely to increse

32
Q

what is cross elasticity of demand

A

Cross elasticity of demand (XED) measures the percentage change in quantity demand for a good after a change in the price of another

33
Q

how to calculate cross elasticity of demand

A

the change in quantity demanded of good A/ the change in price of good B

34
Q

how can XED help firms

A
  1. if there are no substitutes firms can price their product higher
  2. 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.
35
Q

what does an XED greater than one mean

A

strong complements/ substitutes and changes in a price of one good may result in strong changes in QD of another good

36
Q

why may supply be elastic

A

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

37
Q

what does a pes of 0 mean

A

perfectly inelastic

38
Q

what does a pes of infinity means

A

perfectly elastic

39
Q

demand

A

the number of consumers willing and able to buy a good or service at a given price

40
Q

supply

A

the amount of goods that suppliers are willing and able to sell at a given price

41
Q

Where is the point of revenue maximisation

A

where the curve is unitary elastic

42
Q

what is the minimum efficient scale

A

where average costs can’t be lowered anymore

micro Economics (8 decks)

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