Topic 3: Price Elasticity of Demand Flashcards
what is price elasticity of demand
measure of the responsiveness of quantity demanded to changes in price
explain when demand is elastic
- Elastic when % change in quantity demanded is greater than the % change in price
- Quantity demanded highly responsive to change in price
explain when demand is inelastic
- Inelastic when the % change in quantity demanded is less than the % change in price
- Quantity demanded relatively unresponsive to changes in price
explain when demand is unit elastic
- Unit elastic when the % change in quantity demanded= % change in price
- Quantity demanded responds proportionately to changes in price
numerically, when is demand elastic, inelastic or unit
elastic= greater than 1 inelastic= less than 1 unit= equals one
how does availability of close substitutes make a good elastic?
- More close substitutes= more people will switch to cheaper products
- More similar products > more elastic
how does time make a good elastic?
- More time passes= opportunity to find alternatives
- Example: moving towards electric cars when petrol price increase
how does time make a necessity v luxury elastic
- Necessities= inelastic, while luxuries= elastic (can do without // more responsive)
how does time make a good elastic
- Narrowly defined market= more elastic, broadly defined= more inelastic
- Example: demand for food inelastic, demand for ice cream elastic
what depends how you calculate ED
whether you’re given percentage change or actual change
how do you calculate ED from percentages
point method (basic equation)
- percentage change in QD/ percentage change in P
how do you calculate ED from actual change
mid point method
formula for mid point
Q2−Q1 × P2+P1
P2 - P1 Q2 + Q1
explain when a good is perfectly elastic
ed= infinite
- horizontal curve
- • If price increases even slightly above its current equilibrium, the Qd will fall to zero
explain when a good is perfectly inelastic
- Demand curve is vertical
* The same quantity of the good will be demanded regardless of what the price is (%change Qd= 0)
formula for revenue
TR= PRICE X QUANTITY
In elastic goods, what happens to Q and therefor TR when P is increased
large decrease in Q
= decrease TR
In elastic goods, what happens to Q and therefor TR when P is decreased
large increase in Q
= Increase TR
In INelastic goods, what happens to Q and therefor TR when P is increased
small decrease in Q
= increase TR
In INelastic goods, what happens to Q and therefor TR when P is decreased
small increase in Q
= decrease TR
when drawing curve is elastic or inelastic flatter
o Elastic: flatter curve
o Inelastic: steeper curve
how is income elastitict of demand denoted
E i
how is cross elasticity of demand denoted
Ex
how is price elasticity of supply denoted
Es
what is income elasticity of demand + formula
- Responsiveness of change in quantity to change in income
%cahgne in Qd/ %change in income
are normal goods and inferior positive income elasticise or negative
o Normal goods: higher income raises quantity demanded
♣ Qd and income move in same direction= positive income elasticises
o Inferior goods: higher income lowers quantity demanded
♣ Qd and income move opposite directions= negative income elasticities
among normal goods, what is the variation in elasticity size
o Necessities= small income elasticities (consumers always buy)
o Luxuries= large income elasticities (consumers can do without if income low)
what is cross price elasticity + formula
- Responsiveness from change in price of one good, on demand for another good
%cahgne in Qd of 1 good/ %change in price of 2nd good
if the cross price elasticity is postive=
o Positive Ex: substitutes
♣ Price of one good moves in same direction as quantity of other good
if the cross price elasticity is negative=
o Negative Ex: complements
♣ Price of one good moves opposite direction as quantity of other good
is elasticity of supply calculated the same as demand
yes, either basic formula or mid point
if an elastic good falls or rises in price, what is the impact on expenditure
o Fall in price= increase in expenditure
o Increase in price= expenditure decreases
if an inelastic good falls or rises in price, what is the impact on expenditure
o Fall in price= decrease in expenditure
o Increase in price= total expenditure increases
