Price Elasticity Of Demand Flashcards
Why is elasticity useful?
Because it shows a descriptive statistic between two variables.
How do you calculate price elasticity of demand?
Price elasticity of demand = percentage change in quantity demand/ percentage change in price
What does price elasticity of demand mean?
Measures the extent to which the demand for a good changes in response to a change in the price of that good.
What are the five factors that determine price elasticity of demand?
- Substitutability
- Percentage of income
- Necessities or luxuries
- The ‘width’ of the market definition
- Time
How does substitutability affect price elasticity of demand?
When a substitute exists for a product, consumers respond to a price rise by switching expenditure away from the good and buying a substitute whose price has not risen. When very close substitutes are available, demand for the product is highly elastic. Conversely, demand is likely to be inelastic when no substitutes are available.
How does percentage of income affect price elasticity of demand?
The demand curve for goods or services on which households spend a large proportion of their income tend to be more elastic than those of small items that account for only a small fraction of income. Those products which are rarely purchased, people hardly notice the effects of a change in price on their income.
How do necessities or luxuries affect price elasticity of demand?
The demand for necessities is price inelastic, whereas demand for luxuries is elastic. This however depend largely on whether there are substitute products or not.
How does the ‘width’ of the market definition affect price elasticity of demand?
The wider the market, the lower the price elasticity of demand. E.g. The demand for bread produced by one bakery is likely to be more elastic than the price elasticity of demand of all bakeries. This is because the bread baked in other bakeries provides a number of close substitutes for the bread produced in just one bakery.
How does time affect price elasticity of demand?
Demand is more elastic in the long run than it is in the short run because it takes time to respond to a price change.
