Price Elasticity Flashcards
What is utility
The satisfaction we derive from consuming goods and services
What is total utility
The total satisfaction gained by adding up all the utils
What is marginal utility
The satisfaction gained from conusming the last unit
What is the law of diminishing marginal utility
The total utility will rise with each additional unit consumed but at a slower rate, until total utility decreases due to the decreased marginal utility of each unit
What is Price Elasticity Of Demand
A measure of how responsive demand is to a change in price
What is the formula for Price Elasticity Of Demand
Percentage Change Quantity Demanded / Percentage Change In Price
What are the 5 types of Price Elasticity Of Demand
Perfectly Inelastic
Perfectly Elastic
Relatively Elastic
Relatively Inelastic
Unitary Elasticity
What is Perfectly Inelastic
The value of PED is always 0 and entirely unresponsive to price changes.
To improve revenue, always increase price
What is Perfectly Elastic
Value of PED is more than 1 up to infinity. Demand is extremely responsive to change in price
What is Relatively Elastic
The value is more than 1 but less than infinity. The demand is responsive to a change in price.
To improve revenue, always decrease price
What is Relatively Inelastic
The value of PED is less than 1 but more than 0. Demand is very unresponsive to changes in price.
To improve revenue, increase price only
What is Unitary Elasticity
Value of PED is 1.
Responsiveness of demand is proportionate to the change in price
Price changes have no effect on revenue
What is Price Elasticity Of Supply
The measure of responsiveness of supply to a change in price
What is the Short-run
The period of time in which the producer is faced with at least one fixed input
What are the 2 inputs that are fixed in the short-run
Land and Capital
What is the formula for Price Elasticity Of Supply
Percentage change in quantity supplied / percentage change in price
What are the 3 factors that influence PES
Number of suppliers in the market
Time taken to produce the product
Nature of the product and durability
How does number of suppliers in the market affect PES
When there are only a few suppliers of a product, price increases are not followed by large increases in the quantity supplied
How does time taken to produce the product affect PES
Products that take a lot of time to produce, will result in the output being less responsive to changes in price
How does the nature of the product and durability affect PES
Goods that are easily stored are generally low priced and in abundant supply
What are the variables that affect PED (5)
Proportion of income spent on the product
Frequency with which the product is purchased
Time
Availability of substitute products
Addictive and irreplaceable products
How does the proportion of income spent on the product affect PED
If consumers spend a small amount of their income on a good, their demand will be unresponsive to changes in price
How does the frequency with which the product is purchased affect PED
A consumer is less likely to be concerned about the price of a good if it is not bought often
How does Time affect PED
If unlimited time is available to shop, consumers will be more responsive to price changes
How does availability of substitute products affect PED
When there is only one supplier of a product, choice is limited and consumers have to pay whatever price is charged. Therefore less responsive
How do addictive and irreplaceable products affect PED
If products are addictive or irreplaceable, demand is less responsive to changes in price
Look at page 107
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What does Income elasticity of demand measure
The responsiveness of demand to a change in income
What is the formula for IED
Percentage Change quantity demanded / Percentage change in income
What is a normal good
A good that is demanded more when income increases
What is an inferior good
A good that is demanded less when income rises
Look at page 109
.
What Cross Elasticity of Demand
The measure of the responsiveness of demand for one good to a change in the price of another good
What is the formula for CED
Percentage change in quantity demanded of Good A / Percentage change in price of good B
What are substitutes
Goods that have specifically been produced to be repleacements for each other
What is CED for substitutes
Positive
What are complements
Two goods that are used together or in conjunction with each other
What is CED for complements
Negative
