Price Elasticity of Demand and Supply Flashcards
Price Elasticity of Demand
How demand for a product changes when its price changes
Elastic and Inelastic Goods
Elastic = demand changes substantially when price changes
Inelastic = demand only changes slightly when price changes
PED Formula
% change in price
Non-Average Arc vs. Average Arc Methods
In non average, you don’t use averages to work out the changes in demand and price, in the average method, you do!
Range of Price Elasticity
If the PED is:
Between 0 & -1 = inelastic
-1 = unit elastic (% change in both is same)
Above -1 = elastic
Demand Curve Formula
Qd = a - bP
Qd = quantity demanded a = point where curve starts on Y axis b = gradient slope P = price
Price Elasticity and Demand Cruves
Perfectly elastic = any price increase causes total loss of demand, horizontal curve
Elastic = demand very responsive to price changes, steady sloping curve
Perfectly inelastic = demand is unchanged by increase or decrease in price, vertical curve
Inelastic = demand not very responsive to price changes, steep curve
Unit elastic = demand changes are exactly proportional to price changes, consistent slope
Uses of PED
3 main uses:
Companies use it to forecast revenue changes
Companies to choose levels of production or purchases
Govs to forecast the affect on sales tax revenue
Forecasting Revenue Changes
Price increase:
Inelastic demand = revenue increase
Unit elastic = revenue stays the same
Elastic = revenue decreases
Price decrease:
Inelastic = revenue decreases
Unit elastic = revenue stays the same
Elastic = revenue increases
Factors Influencing PED
% of income spent on the good/service
Availability of substitutes
Product status; necessity or luxury
Time since price changed
Brand loyalty
Competitor pricing
Habit
Definition of the market - broader the definition, the less elastic
Price Elasticity of Supply
Sensitivity of the level of supply to any change in price
PES Formula
% change in price
Levels of Supply Elasticity
Greater than 1 = elastic
1 = unit elastic
Less than 1 = inelastic
Supply Curve Formula
Qs = C + dp
Qs = quantity supplied C = point where curve starts on X axis d = gradient slope p = price
Supply Elasticity and Supply Curves
Perfectly inelastic = no matter the price change, supply is unchanged, vertical
Perfectly elastic = supply occurs at a given price only, horizontal
