T1: LS12 - Elasticity Flashcards
Price elasticity of demand definition and equation
- Measures the responsiveness of demand given a change in price.
- measured as the PED = %change in QD/ %change in price
What does price elastic mean and what is it PED
- Price elasticity demand: refers to a good where the quantity demanded changes by a proportionally large amount than the price
- PED > 1
What is price Inelastic it’s and it’s PED value?
- Price Inelastic: refers to a good where the quantity demanded changes by a proportionally smaller percent compared to the change in price.
- PED < 1
What do each PED value mean
0 - perfectly Inelastic
<1- Inelastic
> 1 - elastic
1 - unitary elastic
Infinite - perfectly elastic
Determinants of PED
S - substitute products (number)
P - proportion of income
L - luxury or necessity good
A - Addictiveness
T - time to choose products
How does number of substitutes impact PED?
- More substitutes —> more choice of different products to choose from —> greater ability/ potential for consumers to switch products as prices change
- More choice of different products with low prices or better quality
How does the proportion of income impact PED?
- cheap product = Inelastic —> the cheaper a product is and the lower % of income it takes up —> less likely to change products since the cost is less substantial so causes less of an issue for disposable incomes
- expensive items = elastic —> more expensive —> larger % of disposable income so has a larger impact on consumers —> more likely to switch to alternatives that are cheaper
How does the type of good (luxury or necessity) impact PED?
- Necessities —> more Inelastic —> demand remains more constant as it is an essential and needed by most so the quantity demanded changes by less % than the price.
- Normal/ non-essential —> more elastic —> considered as non-essentials so demand will change by a larger % as they are easily replaceable and demand depends on level of disposable incomes
- Luxury —> rare case —> inelastic —> for the super wealthy, demand remains constant due to product status despite the changes in price.
How does addictiveness impact PED?
- Addictive —> more consumers crave the product so demand remains constant as consumers cannot stop consuming the G&S.
—> makes the good price Inelastic demand —> addiction means consumers do not care about the price and are willing to spend to fuel their addiction.
How does Time impact PED?
- Time to choose products —> gives consumers more opportunity to find better or other alternatives —> demand changes by larger % as consumers analyse the choose from substitutes that better satisfy their needs.
Price elasticity of supply definition and equation
Price elastic supply: measures the responsiveness of supply given a change in price on a G&S
PES = % change in QD/ % change in Price
Price elastic supply meaning
Price elasticity: when the % change in QS is proportionally larger than the % change in supply
Price Inelastic supply meaning
Price Inelastic: when the % change in supply is proportionally smaller than the % change in price
What the determinants of Supply?
P - perishable
S - spare capacity
S - stock
S - sustainability of FOP
T - time to produce
How does the perishable nature of goods impact PES?
Perishable —> stock has a smaller lifespan —> smaller stockpiles can build up —> less supply to be provided when demand changes —> higher % price change
How does the spare capacity of FOP impact PES?
- High spare capacity of FOP —> more factors of production are available and un-utilised —> can be employed to increase efficiency of production —> increase supply by larger %.
How does the level of stock/ finished goods available impact PES?
More stock/ finished goods —> firms will be able to increase supply on the market as demand changes —> more responsive to changes in prices —> more elastic
How does the level of sustainability of Factors of Production (FOP) impact PES?
- More sustainable FOP —> firms will be able to maintain same standards and output of production —> be able to produce larger supplies as of and when needed
- Supply produced changes more than price —> price elastic
How does time to produce impact PES?
- less time to produce G&S —> larger outputs of the good can be produced as demand changes —> the supply produced can be increased/ decreased by larger amounts compared to price changes —> price elastic
