topic 3:20 elasticity Flashcards
definition+formula
PED
a measure of responsiveness of the quantity of good demanded to the changes in price.
percentage change in qty/price
price inelastic demand
price elastic demand
quantity demanded is relatively responsive - ped less than 1 //unresponsive ped more than one
unit elastic d/s
percentage change in qty d/s is same as percentage change in price
meaning change in price leads to a proportionate change in qty demanded
elasticity chapter
perfectly inelastic/elastic d/s
qty d/s is completely unresponsive//infinitely responsive to change in price.
YED PED PES
measure or responsiveness of qty d/s to price/income
YED
measure of responsiveness of demand to changes in income.
calc: change in demand/change in income
diagram for p/y:
1. inelastic,
2. elastic,
3. unit e
4. perfectly ine
5. perfectly e
- steep downwards
- not steep downwards
- reciprocal graph
- vertical
- horizontal
determinants of PED
- number and closeness of substitutes
- necessities vs luxuties
- length of time
- proportion of income
number and closeness of substitutes as a determinant of PED
the higher the number/closeness of substitutes, the more elastic the demand will be as consumers are more sensitive to pice changed and will therefore more than proportionately switch to substitutes if there is an increase in price
necessities vs luxuries as a determinant of PED
greater necessity, more inelastic the demand as consumers require the good and therefore are less likely to react to price changes. greater the luxuty, more elastic demand
length of time as a determinant of PED
the longer the time period in which a consumer makes a purchasing decision, the
more elastic the demand, as consumers have the time and means to evaluate other
options, and therefore are better informed of substitute goods which they can switch
to with a longer period of time to make decisions, therefore become more sensitive to
price changes
proportion of income as a determinant for PED
the greater the proportion of income, the more elastic the demand as a percentage
increase in a good that takes up a large proportion of income translates to a much
more significant proportion of their income relative to the same percentage increase
for a much cheaper good. hence, consumers are more sensitive to changes in price of
goods that take up a large amount of their income
why does PED vary along line of straight line curve
With reference to Diagram.1, from output ranging from 0 to Q1, demand is price elastic. Taking rice
to be an example of the good, this is because at a higher price range over 0 to Q1 such as P2, the
proportion of income spent on rice is higher. As such, a change in the price of rice will affect household
expenditure to a larger extent and consumers are more price sensitive. This, an increase in the price
of rice will result in a more than proportionate decrease in quantity demanded of rice. Therefore, for
output below 0Q1, the demand for rice is price elastic.
* Over output ranging from Q1 to Q0 however, the demand for rice is price inelastic as price decreases
from P1 to P0 over the output range of Q1 to Q0. At this lower price range, households spend a lower
proportion of their income on rice. Hence, a change in the price of rice will therefore affect the
household expenditure to a smaller extent and consumers are thus less price sensitive. Hence, an
increase in the price of rice at this lower price range will result in a less than proportionate decrease
in quantity demanded of rice. Hence, for the output between Q1Q0, demand for rice is price inelastic.
* Since PED is calculated as 1/slope x p/q, and the slope is a straight line, the demand curve gradient
is constant, the 1/slope is also constant. This, the PED value is defined by the ratio of the price to
quantity demanded. In summary , as price decreases and the quantity demanded increases along
the demand curve, PED value decreases down the demand curve as the ratio of price to quantity
decreases.
