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IB Economics > Unit 3 Elasticity > Flashcards

Unit 3 Elasticity Flashcards

1
Q

Price Elasticity of Demand (PED) formula

A

percentage change in quantity demanded/percentage change in price

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2
Q

elasticity

A

the measurement of how reactive and responsive one variable is when another changes

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3
Q

Price Elasticity of Demand (PED)

A

a percentage measure of the responsiveness of the quantity of a good demanded to changes in its price

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4
Q

why PED is always negative

A

law of demand states that quantity demanded changes inversely to price, downward slope

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5
Q

change in quantity demanded formula

A

Qd(new) - Qd(old)/Qd(old) x 100%

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6
Q

change in price formula

A

P(new) - P(old)/P(old) x 100%

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7
Q

PED < 1

A

demand is relatively inelastic

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8
Q

PED < 1

A

demand is relatively elastic

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9
Q

PED = 1

A

demand is unit elastic

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10
Q

PED = 0

A

demand is perfectly inelastic (theoretical extreme)

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11
Q

PED = infinity

A

demand is perfectly elastic (theoretical extreme)

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12
Q

determinants of PED

A

number/closeness of substitutes, demand within product groups, proportion of income spent on the good, addiction, degree of necessity, advertising , time period

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13
Q

total revenue

A

the income received from selling a product

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14
Q

TR formula

A

P x Q

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15
Q

effect of price increase on total revenue when PED > 1

A

TR falls

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16
Q

effect of price increase on total revenue when PED = 1

A

TR stays the same

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17
Q

effect of price increase on total revenue when PED < 1

A

TR rises

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18
Q

effect of price increase on total revenue when PED < 1

A

TR rises

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19
Q

effect of price decrease on total revenue when PED > 1

A

TR rises

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20
Q

effect of price decrease on total revenue when PED = 1

A

PED stays the same

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21
Q

effect of price decrease on total revenue when PED < 1

A

TR falls

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22
Q

commodities/primary products

A

inelastic products that do not have many substitutes

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23
Q

examples of commodities/primary products

A

agricultural goods, oil, minerals

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24
Q

YED formula

A

percentage change in quantity demanded/percentage change in income

25
Q

YED

A

the responsiveness of the quantity demanded of a good to a change in income

26
Q

positive YED

A

normal good

27
Q

negative YED

A

inferior good

28
Q

YED > 1

A

income elastic

29
Q

0 < YED < 1

A

income inelastic

30
Q

normal good

A

when income increases, demand for normal goods increases, when income decreases, demand for normal goods decreases

31
Q

inferior good

A

when income increases, demand for this good falls, and when income decreases, demand for this good rises

32
Q

YED = 0

A

no response to income change

33
Q

Engel curve (Ernst Engel)

A

illustrates the relationship between consumer demand and household income

34
Q

what the engel curve shows

A

a continuum: at very low incomes, certain goods may be deemed a luxury, as income increases it becomes a necessity, and finally at high levels of income the same good becomes inferior

35
Q

as income rises (necessities)

A

people buy more food but the proportion of income spent on food increases more slowly than income

36
Q

as income rises (luxuries)

A

quantity demanded rises faster than income, the proportion of income spent on such goods increases faster than income

37
Q

importance of YED for firms

A

sales forecasting, pricing policy, diversification

38
Q

sales forecasting

A

a firm can forecast the impact of a change in income on sales volume and revenue

39
Q

pricing policy

A

knowing YED helps firms decided whether to raise or lower prices following a change in consumer incomes

40
Q

diversification

A

firms can diversify and offer a range of goods with different YEDs to encourage positive economic growth and development

41
Q

importance of YED in explaining changes in the sectoral structure of the economy

A

as economies grow, their sectoral structure expands from primary to secondary to tertiary production and incomes rise, so there is more demand for manufactured goods and services

42
Q

Price Elasticity of Supply (PES)

A

measures the responsiveness of quantity supplied of a product following a change in its price along a given supply curve

43
Q

PES is always _____

A

positive

44
Q

Price Elasticity of Supply (PES) formula

A

percentage change in quantity supplied/percentage change in price

45
Q

PES > 1

A

supply is price elastic

46
Q

PES < 1

A

supply is price inelastic

47
Q

examples of products which have price elastic supply

A

mass-produced goods, carbonated soft drinks, toothpaste

48
Q

examples of products which have price inelastic supply

A

goods which are difficult to supply, fresh fruit and vegetables that take time to grow

49
Q

PES = 1

A

unitary price (curve starts at the origin)

50
Q

PES = 0

A

supply is perfectly price inelastic; change in price has no impact on the quantity supplied, as there is no spare capacity to raise output

51
Q

examples of PES = 0

A

demand-priced concert tickets, football stadium with limited seat capacity

52
Q

PES = ∞

A

supply is perfectly price elastic; supply can change without any change in price due to the spare capacity that exists at the current price level, theoretical

53
Q

examples of PES = ∞

A

a huge stock of Duracell batteries, any increase in demand will result in more supply without the price being risen

54
Q

determinants of PES

A

time, closeness of producer substitutes, unused capacity, storability, stocks, rate at which costs related to producing more increases

55
Q

graph of PES = 0

A

vertical

56
Q

graph of PES = ∞

A

horizontal

57
Q

the longer the time period,

A

the larger the PES

58
Q

ways firms can improve the value of their PES

A

create spare capacity, keep large volumes of stocks, improved storage systems to prolong the shelf-life of products, upgrade technology, training employees to improve labor capacity

59
Q

application of PES

A

people do not like investing in products that have unstable supply, industries that produce primary commodities are risky because they have larger demand shifts

IB Economics (4 decks)

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