Theory of Elasticity Flashcards
Define PED
It measures the responsiveness of quantity demanded due to a change in price, ceteris paribus
‘H’ factor of PED
Habits of consumers
A habitually-consumed good (eg. cigarettes, liquor) will have a more price inelastic demand
‘I’ factor of PED
Proportion of income
A higher the proportion of income a good costs, the more price elastic the demand as a rise in price will further sway consumption.
‘N’ factor of PED
Degree of necessity
The higher the degree, the more price inelastic the demand as a change in price will lead to a less than proportionate change in quantity demanded.
‘T’ factor of PED
Time period
People can overcome their desire for vices consumption over time, or find closer and more substitutes to a good as time passes.
‘S’ factor of PED
Number and closeness of substitutes
The more substitutes available or the more substitutable 2 goods are, the more price elastic the demand as consumers can choose to consume more of the other good due to a change in price.
‘S’ factor of PED
Number and closeness of substitutes
The more substitutes available or the more substitutable 2 goods are, the more price elastic the demand as consumers can choose to consume more of the other good due to a change in price.
Define YED
It measures the responsiveness of demand for a good due to a change in income, ceteris paribus.
What does negative YED indicate?
Inferior good
As income levels rise, the demand of inferior goods fall.
What does positive YED indicate?
Normal goods
As income levels rise, the demand for normal goods would also increase.
Define XED
It measures the responsiveness of demand for a good due to a change in price of another good, ceteris paribus.
What does positive XED indicate?
The goods are substitutes
What does negative XED indicate?
The goods are complements.
Define PES
It measures the responsiveness of the quantity supplied of a good due to a change in price, ceteris paribus.
‘S’ factor of PES
Stocks and inventories
Firms would be more responsive to a rise in price of a good by supplying their stocks to the market to reduce prices.
‘C’ factor of PES
Spare capacity of firms
Firms are more able to respond to price rises by increasing output.
‘E’ factor of PES
Ease of factor mobility and substitutability
The lower the ease, the lower the ability of firms to increase or decrease FOP input into a production from other productions, reducing output. This causes a more price inelastic supply.
‘N’ factor of PES
Nature of production process
The more complex a production is, the harder it is to raise output in a short period of time as talents and complicated machineries need to be sourced, causing supply to be price inelastic.
‘T’ factor of PES
Time period
In the very short run, firms are almost unable to respond to price changes, causing supply to be perfectly price inelastic.
In the short run, firms can seek to increase spare capacity and increase stocks, causing supply to be price inelastic
In the long run, firms can develop technology or make FOPs more mobile between different productions, causing supply to be more price elastic.
