Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Economics A level Micro > Price, income and cross elasticities of demand > Flashcards

Price, income and cross elasticities of demand Flashcards

1
Q

What is the formula for percentage change?

A
  • Change in value divided by original value multiplied by 100.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is an elasticity coefficient?

A
  • The measure of the response of one variable to changed in another variable.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is Price Elasticity of Demand?

A
  • It measures the responsiveness of demand to a change in price.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is the PED formula?

A
  • The percentage change in quantity demanded divided by the percentage change in price (dinner on plate).
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

If the PED is 0 what is the title given?

A
  • Perfectly inelastic.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

If the PED ranges between 0<-1 what is the title given?

A
  • Price inelastic.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

If the PED is -1 what is the title given?

A
  • Unitary (constant) elasticity.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

If the PED is -1>infinity what is the title given?

A
  • Price elastic
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

If the PED is infinity what is the title given?

A
  • Perfectly elastic
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

If the PED is 0, what is the relevance to the business?

A
  • Theoretically, the business can charge as high as a price as it wants to.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

If the PED is between 0 and -1, what is the relevance to the business?

A
  • As firms should raise P, D will decrease, but total revenue will increase.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

If the PED is -1, what is the relevance to the business?

A
  • Increasing or decreasing price will lead to no change in total revenue.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

If the PED is -1>infinity, what is the relevance to the business?

A
  • A firm should lower P, D will increase, but total revenue will increase.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

If the PED is infinity, what is the relevance to the business?

A
  • Theoretically, if the business increased price above a certain point, D would completely disappear.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What are the determinants of price elasticity of demand?

A
  • Substitutes
  • Time
  • Definition of the market ‘width’
  • Necessity or luxury
  • Percentage of income
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

How are substitutes a determinant of price elasticity of demand?

A
  • The number and closeness of available substitutes will help to determine PED.
  • If there are no close or lack of substitutes, the product is likely to be very price inelastic and vice versa.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

How is time a determinant of price elasticity of demand?

A
  • Short-run, products are likely to be more price inelastic; consumers will find it difficult to change their shopping habits.
  • Long-run, products are likely to be more price elastic as consumers adjust to changing market conditions.
18
Q

How is the definition of the market ‘width’ a determinant of price elasticity of demand?

A
  • As market widens, PED becomes more inelastic, no close substitutes.
  • Demand for specific brands would have a higher PED.
19
Q

How is necessity or luxury a determinant of price elasticity of demand?

A
  • It can be said that demand for necessities is price inelastic whereas demand for luxuries is price elastic but this often depends on the availability of substitutes.
20
Q

How is percentage of income a determinant of price elasticity of demand?

A
  • People will pay more attention to changing price of ‘big ticket’ items.
  • For items on which only a small amount is spent, people are unlikely to notice the change in price.
21
Q

What is the Income elasticity of demand?

A
  • A measure of the responsiveness of demand to a change in income.
22
Q

What is the formula of the Income Elasticity of Demand?

A
  • Percentage change in quantity demanded/ Percentage change in income
23
Q

What would it mean if the YED is positive?

A
  • The YED would indicate a normal good.
24
Q

What would it mean if the YED is negative?

A
  • The YED would indicate an inferior good.
25
Q

What would it mean if the YED ranges from -1<x<+1?

A
  • The good is income inelastic.
  • The demand changes at a lower proportion than the increase in income.
26
Q

What would it mean if the YED ranges at x<-1 or >+1?

A
  • The good is income elastic.
  • The demand changes at a higher proportion than the increase in income.
27
Q

What are the determinants of income elasticity of demand?

A
  • Whether the good is a necessity or a luxury.
  • The level of income of a consumer.
  • Standards of living.
  • The economic cycle.
28
Q

How does the good being a necessity or luxury determine the income elasticity of demand?

A
  • At higher standards of living, increased consumer incomes lead to more purchasing of luxury goods as demand for necessities is less prioritised.
29
Q

How does the level of income of a consumer determine the income elasticity of demand?

A
  • Poorer consumers tend to spend their income on necessities.
  • As wealth increases, the YED for necessities moves towards zero, consumers more satisfied with the amount of the product.
  • Normal goods that are necessities will have lower positive YED coefficients.
  • As consumer incomes increase, they are likely to spend some of their income on luxuries, these products have higher positive YED coefficients.
30
Q

How does the standards of living determine the income elasticity of demand?

A
  • Wealthier countries are likely to have consumers with higher disposable incomes.
  • Therefore, they would have greater spending power and are likely to use some of this greater income to buy luxury goods and services.
  • Firms will therefore produce superior products that meet needs of consumers.
31
Q

How does the economic cycle determine the income elasticity of demand?

A
  • When the economy is in recovery mode and leading into boom, disposable incomes increase and consumers spend a greater proportion of this increase in income, firstly on necessities and then on luxury goods.
  • When the economy is in decline, the opposite occurs, and consumers move to necessities and then inferior goods.
32
Q

What is the definition of the cross-elasticity of demand?

A
  • A measure of the responsiveness of demand for one good, x to a change in price of another good, y.
33
Q

What is the formula of the cross-elasticity of demand?

A
  • Percentage change in quantity demand of good X/ Percentage change in price of good Y.
34
Q

What does it mean if the XED ranges from -1 to 1?

A
  • Cross-price inelastic.
  • Demand for good X changes at a lesser proportion than the change in price of Good Y.
35
Q

What does it mean when the XED is x<-1 or >+1?

A
  • Cross-price elastic.
  • Demand for Good X changes at a greater proportion than the change in price of Good Y.
36
Q

What are the determinants of the cross-elasticity of demand?

A
  • Substitutes
  • Complements
  • Has no relationship
37
Q

How do substitutes become an influencing factor of the XED?

A
  • Substitutes will have a positive XED.
  • As the price of good Y increases (positive), the demand for good X will increase (positive).
  • Close substitutes will have a higher XED (elastic) as consumer demand for good X will be more sensitive to a change in price of good Y.
38
Q

How do complements become an influencing factor of the XED?

A
  • Complements will have a negative cross-elasticity of demand.
  • As the price of Good Y increases (positive), the demand for good X will decrease (negative).
  • Close complements will have a higher XED (elastic) as consumer demand for good X will be more sensitive to a change in price of Good Y.
39
Q

How do two goods that have no relationship an influencing factor of the XED?

A
  • The change in price of Good X will have no impact on the demand for Good Y.
  • XED will be 0.
40
Q

What will firms do about substitutes to change the cross-elasticity of demand?

A
  • Firms will try to differentiate their products from the competition.
  • This is done through advertising and branding of the product; consumers would be less likely to switch to competitor’s products.
  • A firm with plenty of close substitutes will be less able to increase its prices.
41
Q

What will firms do about complements to change the cross-elasticity of demand?

A
  • Firms will produce a range of complements to accompany their core products.
  • A firm that sells a range of complements is likely to increase total revenue.

Economics A level Micro (8 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions