Theme 1 Topic 13 - Elasticity Flashcards
What are seven factors affecting the demand for a product?
Quality, Price, Income, Tastes/trends, Substitutes, Complimentary goods, Advertising
Define Price Elasticity of Demand
Loos at how demand responds to changes in price - expressed as a %
Price Elasticity of Demand =
% Change in Demand/% Change in Price
If demand is very responsive (elastic) to price, the PED figure will be…
Bigger than 1
If demand is not very responsive (inelastic) to price, the PED figure will be…
Less than 1
What are three factors influencing price elasticity?
Type of product, Competition, Brand image
If a product is elastic, what will happen to revenue if price decreases?
Revenue could increase as it may increase sales
If a product is inelastic, what will happen to revenue if price decreases?
Revenue will decrease as the same amount of the product would be sold for a lower price
Define Price Inelastic Demand
The % change in demand is smaller than the % change in price
What are two problems with using price elasticity?
Many other factors influence demand not just price, The value of price elasticity is an estimate
Define Income Elasticity of Demand
Looks at how demand responds to changes in income - expressed as a %
Income Elasticity of Demand =
% Change in Quantity Demanded/% Change in Price
If demand is very responsive (elastic) to income, the YED figure will be…
Bigger than 1.5 - it is a luxury good
Define Luxury Good
A product with a YED above 1.5
If demand is not very responsive (inelastic) to income, the YED figure will be…
Less than 1.5 - it is a normal good
Define Normal Good
A product with a YED between 0.1 and 1.5
If demand falls while income rises, the YED figure is…
A minus - it is an inferior good
Define Inferior Good
A product with an income elasticity which is negative
What is a factor influencing income elasticity?
Whether the product is a necessity, luxury or inferior good
What are three reasons income elasticity is important for businesses?
Helps plan ahead by forecasting economic growth, Can set sales budgets and plan to accommodate this, Producers of inferior goods can diversify their range in a recession
Define Price Elastic
Where demand is sensitive to changes in price
Define Price Inelastic
Where demand is not very sensitive to changes in price
Define Income Elastic
Where demand is sensitive to changes in income
Define Income Inelastic
Where demand is not very sensitive to changes in income
