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Economics AQA > Price Elasticity > Flashcards

Price Elasticity Flashcards

1
Q

Define price elasticity of demand

A

PED measures the responsiveness of a goods quantity demanded given a change in its price

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2
Q

What is the PED formula?

A

PED=
% change in QD / % change in price

If PED is > 1 then demand is price elastic
If PED is < 1 then demand is price inelastic

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3
Q

5 Factors affecting PED

A

Substitutes (no.)
Percentage of income
Luxury or necessity good
Addictive or habit good
Time period

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4
Q

How does number of substitutes affect PED

A

If price of one good increases, consumers are more likely to buy the cheaper substitute. Demand is price elastic

However, if the price of one good increases and there are no or few substitutes, consumers will have no choice but to pay the higher price of the good. Demand is price inelastic.

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5
Q

How does percentage of income affect PED

A

The larger proportion of income a good constitutes, the more responsive its consumers will be to changes in price. Demand is price elastic.

However if the good only requires a small proportion of income, consumers won’t be greatly responsive to changes in price. Demand is price inelastic.

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6
Q

How does luxury/ necessities affect PED

A

Demand for luxury items (TV, designer bags, etc) tends to be highly elastic as demand often changes due to changes in income and availability of less expensive substitutes. These are goods that are not required for survival.

However, demand for necessities (food, medicine, heating, etc) tend to be inelastic. This is because they are required for survival and consumers will continue to buy them regardless of price changes.

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7
Q

State and explain the acronym for PED pricing decisions

A

Elastic. Only. Irritate. Skin

Elastic
Opposite change
Inelastic
Same change

If demand is price elastic, consumers will be more responsive to changes in price. Thus if prices increase revenue will decrease. Likewise, if prices decrease revenue will increase (opposite change)

If demand is price inelastic, consumers will be less responsive to changes in price. If prices increase, revenue increases. Likewise if prices decrease revenue will also decrease (same change)

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8
Q

Define price elasticity of supply

A

PES measures the responsiveness of quantity supplied to a given price change

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9
Q

State the formula for PES

A

PES= % change in quantity supplied/
% in price

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10
Q

If PES is > 1…

A

Supply is price elastic

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11
Q

If PES is <1..

A

Supply is price inelastic

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12
Q

If PES is 0..

A

Supply is perfectly price inelastic

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13
Q

If PES is ♾️..

A

Supply is perfectly price elastic

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14
Q

If PES is 1..

A

Supply is unit price elastic

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15
Q

If PES is 1..

A

Supply is unit price elastic

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16
Q

What does it mean if PES is inelastic

A

PES >1 occurs when a change in price does not affect the the quantity supplied significantly.

17
Q

What does it mean in PES is elastic

A

PES >1 occurs when quantity supplied is significantly responsive to a price change

18
Q

What are the factors affecting PES

A

Production lags (disruptance)
Stock levels
Spare capacity
Substitutability (Factors of production)
Time (short run supply is elastic, long run is inelastic)

19
Q

Define cross elasticity of demand

A

XED measures the responsiveness of quantity demanded of good A given a change in the price of good B

20
Q

What is the formula for XED

A

XED = % change in QD of good A /
% change in price of good B

21
Q

If XED is positive..

A

Goods are substitutes

22
Q

If XED is negative..

A

Goods are complements

23
Q

What is the acronym to work out whether a good is a substitute or complement

A

Party. Seasons. Near.Christmas

P- Positive
S- Substitutes
N- Negative
C- Complement

24
Q

If XED is >1..

A

Goods are elastic and strongly related

25
Q

If XED is <1..

A

Goods are inelastic and weakly related

26
Q

If XED = 0

A

Goods are perfectly inelastic and have no relationship

27
Q

Define income elasticity of demand

A

YED- measures the responsiveness of quantity demanded given a change in income

28
Q

What is the formula for YED

A

YED= % change in QD /
% change in Y (income)

29
Q

What does YED tell us

A

Whether a good is Normal or Inferior

A normal good has a positive YED
An inferior good has a negative YED

30
Q

What is a normal good

A

Goods that see a rise in demand when incomes increase
These are luxury goods

31
Q

What is an inferior good

A

Goods that see a fall in demand when incomes rise

These are off- brand or extremely cheap goods

Economics AQA (3 decks)

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