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
What can happen to demand as incomes changes
It can increase or decrease
Meaning of income elastic
Where demand changes more than the change in income
What does income inelastic mean
Where the change in demand is less than the change in income
How do you calculate the income elasticity of demand
Percentage change in quantity of demand / Percentage change in income
What is cross price elasticity of demand
Measures the extent in which the demand for one good changes in response to the change in price of another
What type of goods would you see effects of the cross elasticity of demand
Complementary goods (joint demand )
Substitutes (competing demand)
How do you calculate the cross price elasticity of deand
%age change in quantity of A / %age change of price of B
What would a small rise in price of close substitues do to the demand for the other product
Change it alot
What would a small rise in price of weak substitues do to the demand for the other product
Not change it alot
What would a small fall in price of close complementary products do to the demand for the other product
Change it alot
What does brand do to the effect cross elasticity of demand
Decrease it as cosnumers are likely to be habitual purchasers and go to that brand as a default choice
What will the CPED for substitues be
Always positive
What will the CPED for complemntary products be
Negative
What would the demand curve of an elastic good look like
More horizontal
What would the demand curve of an inelastic good look like
X =1
What would the demand curve for a perfectly inelastic good look like
Completelemy vertical
What would the demand curve for a perfectly elastic good look liek
Colmpletely horizontal
