Resource Allocation: Elasticities of Demand and Supply Flashcards
What is the definition of elasticity?
A measure used to show the degree of responsiveness of quantity demanded or quantity supplied to a change in one of the determinants of demand and supply
What are the four kinds of elasticities?
PED, YED, XED and PES
What are PED, XED and XED indicators of?
CONSUMER responsiveness to changes in price, income and prices of related goods
What is PES an indicator of?
PRODUCER responsiveness to changes in price of a product
What is price elasticity of demand?
the degree of responsiveness of the quantity demanded of a good to a change in its price, ceteris paribus
What are the different kinds of PEDs?
Perfectly price inelastic, relatively price inelastic, unitary price elastic, relatively price elastic and perfectly price elastic
What does it mean when a good/service is perfectly price elastic?
A change in price results in an EQUAL proportionate change in quantity demanded of a good/service
What does it mean when a good/service is relatively price elastic?
A change in price of the good/service leads to a proportionately larger change in quantity demanded
What are the four determinants of PED?
SNIT:
Availability and closeness of substitutes
Degree of necessity (habitual and necessities)
Proportion of income spent
Duration of time period
What is the definition of TR?
Total receipts received by producers from the sales of goods and services before the deduction of taxes and other costs
How is TR calculated?
product of equilibrium price and equilibrium quantity
