Price Elasticity Flashcards
What is price elasticity for demand?
Elasticity measures the responsiveness of the QD to change in price.
What is the formula for PED
% change in quantity demanded
% change in price
PED>1
Elastic
PED<1
Inelastic
PED = 1
Unit elasticity
PED = 0
Perfectly inelastic
PED = infinity
perfectly elastic
Is the PED normally negative or positive for normal goods
For all Normal goods, PED will be negative, as there
is a negative relationship between price and
quantity on a downward-sloping demand curve.
We always ignore this negative sign.
What does elastic demand look like?
A change in price leads to a more than
proportionate change in quantity demanded.
What does inelastic demand look like?
A change in price leads to a less than proportionate
change in quantity demanded.
What does unit elastic demand look like?A
A change in price leads to an equal proportionate
change in quantity demanded.
What does perfectly inelastic demand look like?
A change in price leads to no change on the
quantity demanded.
What does perfectly elastic demand look like?
A change in price will lead to an infinite change in
quantity demanded.
What are the 4 determinants of PED (CLiP iT)
- Closeness of substitutes.
- Luxury or necessity.
- Percentage of income spent on the good.
- Time period.
Closeness of substitutes affect PED
PED will be more price elastic
if there are close substitutes available.
Luxury or necessity affect PED
Luxury goods tend to be price
elastic, and necessities tend to be price inelastic.
Percentage of income spent on the good affect PED
The smaller
the percentage of income spent on a good, the more
price inelastic the demand will be.
Time period affect PED
In the long run, demand tends to be more
price elastic, as it takes time for consumers to react to
price changes.
What is income elasticity?
Income elasticity of demand measures the
relationship between a change in quantity
demanded and a change in income.
How do you calculate income elasticity (YED)?
Percentage change in quantity demanded of good X
percentage change in real consumers’ income
income elasticity of normal good
positive
Necessities income elasticity
0 -> +1
Demand rises with income, but
less than proportionately.
Luxuries income elasticity
> +1
Demand rises more than
proportionate to a change in income
Inferior goods income elasticity
negative
What is PES?
Responsiveness of quantity supplied to changes in price
How to calculate PES
What does inelastic supply look like
PES of elastic supply
Elastic Supply PES >1
PES of inelastic supply
Inelastic Supply PES <1
Unit Elasticity PES
Unit Elastic Supply PES =1
Perfectly inelastic supply PES
Perfectly Inelastic Supply PES 0
Perfectly elastic supply PES
Perfectly Elastic Supply PES undefined
What does elastic supply look like?
What does Perfect elastic supply look like?
What does perfect inelastic supply look like?
4 Determinants of PES (TUMA)
- Time period
- Unused capacity
- Mobility of factors of production
- Ability to keep stock
Time Period on PES
If production can be increased fast, then PES
is elastic. Ifproduction cannot be increased fast, then PES is inelastic
Over time PES becomes more ELASTIC
Mobility of factors of production on PES
Mobilise = how easy it is to increase production
Low mobility -> INELASTIC
High mobility -> ELASTIC
Unused Capacity on PES
Unused capacity = When a business is not using all its resources
Unused Capaciy -> ELASTIC
Ability to keep stock on PES
Perisable goods -> INELASTIC
Storable goods -> ELASTIC
What is e cross price elasticity of demand (XED)
The cross price elasticity of demand is used to measure the effect a change in price of one product has on the demand for a certain other good.
How to calculate XED
Meanings of XED value
If XED is positive they are subsitute goods
If XED is negative they are complementary goods
