Topic 3 - Price , Income and Elasticity Flashcards
What is elasticity
A measure of the extent which a quantity responds to a variable
What is price elasticity of demand
Measure of how demand chanegs in response to changes price
What does elastic demand mean
Where the percentage change in demand is greater than the change in prices
What is inelastic demand
Where the percentage change of price is greater than the percentage change in demand
How do you calculate price elasticity of demand
Percentage change of demand/ Percentage change of prices
Which curve would have a steeper gradient, an inelastic or elastic demand curve
Inelastic
What are features of price elastic goods
They are very responsive to price change
Many substitutes
Widely available
Are luxury items
Consumers have no time limit
Features of price inelastic goods
Less responsive to price change
Are neccessities
Unique
Short in supply
Few substitues
Habit forming
Does a product being inelastic mean it isnt affected by price rises
No
What does a PED of 0 mean
It is perfectly inelastic and price has no effect
What does a PED of less than 1 mean
It is inelastic, but price has a small effect
What does a PED of 1 mean
The change of price and demand are equal
What does a PED of more than 1 mean
Demand is sensitve to price
On elastic goods what will increases in price do to revenue
Decrease the total revenue
For inelastics goods what will increases in price lead to
Increased revenue
What are factors that influence the PED
Time
Number of subs
Cost of switching between products
Luxury or neccesity?
Proprotion of income spent on the product
Trends
Branding
How do the government intervene if a market isnt allocating resources effectively
Through taxes and subsidise
What is the incidence of tax
The proportion of tax passed onto the consumer
Who absorbs the tax on price elastic goods
Business absorbs most of the tax as demand will fall
What is the impact of tax on price on inelastic products
Taxes are easily passed on
What does it mean for the gov, when elastic goods prices rise
The government lose out of revenue
What will a rise in price of elastic goods do too employment
Employment will fall more, cyclical unemployent
What will a rise in inelastic demand do too employment
Not, much as demand is still there
What is income elasticity of demand
It measures the responsiveness of demand when income changes
