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.
What is income elasticity of demand?
How responsive demand is to a change in income
How do you work out YED?
Percentage change in quantity demanded over percentage change in income.
What are inferior goods?
Has a negative YED. Demand is negatively related to a change in income. Goods will fall in demand if income rises.
What is a normal good?
Demand is positively related to a change in income. Demand for a good rises as income rises. Luxury and necessity
What is a luxury good?
Demand rises more than proportionately to a change in income. Income elastic
What is a necessity good?
Demand is less proportionately responsive to a change in income. Income inelastic.
What might affect income elasticity of demand?
Attractiveness and how large the proportion of household income is spent on the product.
What is cross elasticity of demand (XED)?
Responsiveness of demand for one product to a change in price of another product.
What is the equation for XED?
Percentage change in the quantity demanded for good B over percentage change in price of good A
What is the type of product if XED is >1?
A substitute
What is the type of product if XED is <1?
A complement
What happens if the XED for a product is 0?
Its is completely independent. (no relationship)
