Price Elasticity of demand Flashcards
Price elasticity of demand (PED)
A measure of the responsiveness of the quantity of a good to changes in its price, given by the percentage change in quantity demanded divided by the percentage change in price
PED<1
Inelastic
* companies increase price to increase revenue
PED>1
Elastic
* companies have to decrease price to increase revenue
PED=0
Perfectly inelastic
* companies can charge very high prices
PED=1
Unitary Elasticity
* companies are unable to increase revenues
PED=∞
Perfectly Elastic
Price Inelastic Demand
Relatively low resposniveness of demand to price
Price Elastic demand
Relatively high resposniveness of demand to price
Perfectly inelastic
Refers to a price elasticity of demand value of 0 and arises in the case of a vertical demand curve indicating that any only one amount can be bought at any price
Necessities
- goods that are essential and necessary
- price inelastic
Perfectly elastic
Refers to a price elasticity of demand value of infinity and arises in the case of horizontal demand curve indicating that any quantity can be bought at that one specific price
Unitary PED
- %change in quantity is equal to %change in price
Total revenue
- Quantity sold x Price
- the amount of money received by frims solely from their sales
Luxuries
- goods that are not necessary or essential
- price elastic
Price Elasticity of demand value formula
%Change in Quantity/%Change in price
You Queue then you Pee
Determinents of PED
- necessity or luxury
- time
- availibility of substitutes
- proportion to income
How to cslculate revenue on a PED curve
Price x Quantity
How to calculate govenment tax revenue on PED curve
Pt x Qt
Spotting tax on PED curve
verticsl distance between S1 and S2 at same quantity
How does implementing tax change the supply curve
- looks like it shifts up as for every unit a fixed increase was added
- supply curve actually shifts left
YED for a necessity Diagram
0<YED<1
YED for a luxury Diagram
1<YED
YED for inferior good
You buy less the more income you get; YED<0
PED unitary Diagram
PED=1