Price elasticity of demand Flashcards
Define inelastic demand
Change in quantity demanded is less than proportionate to change in price - PED<1
Examples include necessities that consumers continue to buy even if prices increase.
Define Elastic demand
Change in quantity demanded is more than proportionate to the change in price - PED>1
What is unit elasticity?
When the change in quantity demanded is equal to the change in price, unit elasticity = 1
What factors make price elasticity of demand (PED) more inelastic?
- Good is a necessity
- Smaller number of substitutes
- Small % of income spent on the good
- Short time period
(vice versa for elastic)
What does Price Elasticity of Demand (PED) measure?
The responsiveness of quantity demanded to changes in price
How is Price Elasticity of Demand defined mathematically?
% change in QD / % change in price
What happens to revenue when demand is ELASTIC and PRICE INCREASES?
The decrease in QD in more than proportionate to change in price = Revenue falls
What happens to revenue when demand is INELASTIC and PRICE INCREASES?
The decrease in QD is less than proportionate to change in price = Revenue rises
What happens to revenue when demand is ELASTIC and PRICE DECREASES?
The increase in QD is more than proportionate to the change in price = Revenue rises
What happens to revenue when demand is INELASTIC and PRICE DECREASES?
The increase in QD is less than proportionate to the change in price = Revenue falls
What is the PED equation?
(△Qd/△P) x P/QD
How do you calculate the linear demand curve function?
Qd = a+b(p)
What is a & b in the linear demand curve function?
a = x axis intercept (Qd when P=0)
b = slope of the demand curve (△Qd)
How is the y point of the demand curve calculated?
x intercept/slope of the demand curve
What is △Qd/△P equal to?
The slope of the demand curve (same for supply)
Define price elasticity of supply
Measures how responsive a firm can be in changing Qs when P changes
How is time the main determinant for PES?
Short run = harder to increase Qs - More elastic
Long run = easier to access resources - More elastic
What is the Linear supply function general formula?
Qs=b(p)+a
What is a & b in the linear supply curve function?
b = slope of the supply curve (will always be positive, supply slopes upward)
a = x axis intercept (will be negative, no firm will supply at the price of 0)
Define Income Elasticity of Demand (IED)
measures the impact of income changes on Qd
What is the Income Elasticity of Demand calculation?
% change in Qd / % change in income
What does a negative IED show?
Inferior good - buy when cheap, can’t afford better options
What happens to income and Qd of an inferior good?
- As income increases, Qd decreases
- A income decreases, Qd increases
What does a positive IED show and what happens to income / Qd?
Normal good
- As income increases, Qd increases
- As income decreases, Qd decreases
What is an IED < 1 (still positive)?
Necessity
- as income increases, less than proportionate increase in Qd
What is an IED >1?
Luxury
- as income increaes, more than proportinate increase in Qd
Define Cross Elasticity of demand
measures the relationship of two goods
How do you calculate Cross Elasticity of Demand?
%change in Qd of one good / %change in P of another good
What identifies a substitute good?
an increase in P of good A = an increase in Qd of good B
CPED is positive
What identifies a complimentary good?
an increase in P of good A = a decrease in Qd of good B
