Unit 2 Elasticities of Demand Flashcards
Elasticity
Responsiveness of a chnage in one thing to a change in something else.
Price Elasticity of Demand
Measures the responsiveness of demand after a change in price
PED is calculated by
% change in quantity demanded/ % change in price
PED=0
Perfectly inelastic- when price changes the QD does not change at all.
PED= 0 to -1
Inelastic demand-when price changes the QD changes by a proportinally smaller amount.
PED=-1
Unit elastic- when price changes the QD changes by the same percentage
PED= -1 to -inifinity
Elastic demand- when price changes QD proportionally changes by a larger percentage.
PED=- infinity
When price changes, the QD changes infinitely. There can only be one price.
What will happen to a firm’s revenue?
When a firm faces inelastic demand, an increase in the price will….
Increase revenue
What will happen to a firm’s revenue?
When a firm faces inelastic demand, a decrease in the price will….
lead to a fall in revenue
What will happen to a firm’s revenue?
When a firm faces elastic demand, a fall in price will lead to ….
an increase in revenue
What will happen to a firm’s revenue?
When a firm faces elastic demand, an increase in price will lead to ….
a fall in revenue
If the good is a necessity, PED will be….
more inelastic
If close substitues are available, PED will be….
more elastic
If complementary products lock consumers into a deal then PED will be
inelastic
If the good takes up a large proportion of a consumer’s income, the PED will be….
more elastic
If consumers are addicted to the good, the PED will be…
closer to 0 (inelastic)
In the short run, PED is more likely to be
Inelastic
In the long run, PED is more likely to be
elastic
YED stands for
income elasticity of demand
Formula for calculating income elasticity of demand
% change in quantity demanded/ % change in income
What is another way to think about elasticity?
It is how sensitive a consumer is to a change in price, income or the price of another good.
Income elasticity of demand
measures the responsiveness of demand after a change in income.
Why is it essential to use + or - signs in YED?
Because goods can be luxury, normal or inferior and the signs help with this.
Luxury good
(Positive elastic good), when income changes, QD increases by a greater proportion.
Normal good
When income changes, the QD increases by a smaller proportion. (Positive inelastic)
Inelastic inferior good
When income changes the QD changes by a smaller percentage in the opposite direction.
YED=0
When income changes, the QD does not change at all.
Elastic inferior good
When income changes the QD changes by a larger percentage in the opposite direction.
YED= 5
Luxury good
YED= 0.5
Normal good
YED= -0.5
Inelastic inferior good
YED=-5
Elastic inferior good
Bus transport
Elastic inferior good
Basic sliced bread
Inelastic inferior good
Clothing
Normal good
Jewellery
Luxury good
Formula to calculate XED
% change in QD product A / % change in price of Product B
XED
Cross elasticity of demand
Cross elasticity of demand
Measures the responsivness of demand for one product to a change in the price of another product.
XED= 1 to infinity
Elastic substitute- when price of Product B changes, the QD of Product A changes by a larger percentage in the same direction.
XED= 0 to 1
Inelastic substitute- when the price of product B changes, smaller percentage change in QD of product A. (Weak substitute)
XED=0
No relationship
XED 0 to -1
Inelastic complement- when the price of product B changes the QD of product A changes by a smaller percentage in the opposite direction. (Weak complements)
XED= -1 to infinity
Elastic complement- when price of product B changes, the QD of product A changes by a larger percentage in the opposite direction. (Close complements).
Coke and Pepsi
Elastic substitutes
Tea and coffee
Weak substitutes
Bread and butter
Weak complements
Petrol and cars
Strong complements
