Price, income and cross price elasticities of demand, price elasticity of supply Flashcards
What is a complement?
Where an increase/decrease in the demand of one good leads to an increase/decrease in demand of a by-product. (Joint demands)
What is a substitute?
A good’s demand is increased when the price of another good is increased.
When is two products joint supply?
When a rise in the output of one product leads to a rise in the supply of the other product.
What is inelastic PED?
When demand is less than proportionately responsive to a change in the price level. (Luxury’s with many substitutes)
What is elastic PED?
When demand is more than proportionately responsive to a change in the level
How do you find the price elasticity of demand?
The percentage change in quantity demanded over the percentage change in price
When is PED elastic?
> 1
When is PED unitary? (proportionally responsive to change)
1
When is PED inelastic?
<1
When is PED perfectly elastic? (infinitely responsive)
Infinite (price stays the same for any change in demand)
When is PED perfectly inelastic? (not responsive to change)
0
What are determinants of demand?
Substitutes, Percentage of income, Luxury/necessity, A addictive/ habit forming, Time period
Why is PED important to producers?
They want to know if an increase in price will lead to higher/lower revenue.
How do you work out revenue?
Price x quantity
How do you calculate PES?
percentage change in quantity supplied over percentage change in price
What does PES show?
Measures the response of quantity supplied to a change in price
Why will PES always be a positive?
The price of a good increases, so more will be supplied
When can producers increase their supply without a rise in cost or a time delay?
When it’s elastic >1
When do firms find it hard to change their production in a given time period?
When it is inelastic <1
When is a product elastic?
- Made quickly
- Low cost
- Few resources
When is a product inelastic?
takes time to make, scarce resources
What is an example of a perfectly elastic supply?
Air
What is an example of a perfectly inelastic supply?
Car park
How can firms increase their elasticity?
Improving storage, keeping large amounts of stock, adopting, or upgrading the technology, creating spare capacity.
