Price elasticity Flashcards
price elasticity of demand
the responsiveness of quantity demanded of a good or service to a change in price
formula to calculate PED
percentage change in quantity demanded / percentage change in price
(Queens above Peasants)
If PED = 0
perfectly inelastic- demand does not change when price changes
If PED is between 0 and 1
demand is inelastic
If PED = 1
demand is unit elastic
If PED > 1
demand is elastic
If PED = infinity
demand is perfectly elastic
determinants of price elasticity of demand
(PNDBATH)
Proportion of income
Necessities
Definition
Brand loyalty
Availability of substitutes
Time
Habit-forming goods
price x quantity sold =
revenue
how to increase revenue for an inelastic product
increase price
how to increase revenue for an elastic product
decrease price
Usefulness of PED for producers
-pricing strategies of firms
-price volatility following changes in supply
-effect of a change in indirect tax
-limitations of elasticities
-Problems with inaccurate or incomplete data collection
-consumer price sensitivity changes over time
-elasticity of demand varies by region/time
-rival producers will change their market strategies from time to time
price elasticity of supply (PES)
PES measures the responsiveness of quantity supplied of a good or service to a change in price
formula for PES
% change in Q supplied / % change in price
PES is always …
positive (because of the positive relationship between price and quantity supplied)
If PES = 0
perfectly inelastic
If PES <1
inelastic
If PES = 1
unitary elastic
if PES >1
elastic
If PES = infinity
perfectly elastic
determinants of PES
Time
Availability of stock
Spare capacity
YED
YED (income elasticity of demand) measures the responsiveness of quantity demanded of a good or service to a change in income
formula to calculate YED
% change in QD / % change in Income
What is the good if YED is positive
normal good
what is the good if YED is negative
inferior good
what is the good if YED is >1
luxury
what is the good if YED is <1
necessity
XED
XED (cross price elasticity of demand) measures the responsiveness of quantity demanded of good A to a change in price of good B
formula to calculate XED
% change in QD of good A
/
% change in price of good B
what are the goods if XED is positive
substitute goods
what are the goods if XED is negative
complementary goods
what type of relationship between goods if XED is >1
close relationship (e.g coco pops and milk)
what type of relationship do the goods have if XED is <1
weak relationship (e.g petrol and jam)
