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Introduction To Business Economics > Week 2 - Demand and Supply elasticity > Flashcards

Week 2 - Demand and Supply elasticity Flashcards

1
Q

What is elasticity?

A

Elasticity measures the responsiveness of one variable (e.g demand) compared to a change in another (e.g prices)

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2
Q

What is price elasticity of demand?

A

Is a measure of the responsiveness of quantity demanded to a change in price

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3
Q

Price elasticity of demand equations (2)

A
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4
Q

ARC price elasticity demand formula

A
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5
Q

Elasticity interpretations (2)

A
  • If PED = 0, demand is perfectly inelastic
  • If PED = is between 0 and -1 demand is inelastic
  • If PED = -1, demand is unit elastic
  • If PED is between -1 and -infinity demand is elastic
  • If PED = -infinity, demand is then perfectly elastic
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6
Q

What are the two determinants of price elasticity of demand? (2)

A
  • The number and closeness of substitute goods
  • The proportion of income spent
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7
Q

The number and closeness of substitute goods (determinants of price elasticity of demand)

A

The more substitutes there are and the closer they are the greater the price elasticity of demand will be

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8
Q

The proportion of income spent (determinants of price elasticity of demand)

A

The higher the proportion of our income we spend on a good, the more we will have to reduce our consumption of it following a rise in price therefore demand will be more elastic

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9
Q

PED and total revenue graph (3)

A
  • Where price is elastic price should be decreased to increase revenue
  • When price is inelastic the price should be increased
  • When price is unit elastic this is the optimal price where maximum revenue is optimised
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10
Q

What is income elasticity of demand (YED)?

A

Is a measure of the responsiveness of quantity demanded to a change in income

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11
Q

Income elasticity of demand formula

A
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12
Q

Income elasticity of demand interpretations (3)

A
  • If +Ve, the good is a normal good
  • If +Ve > 1, the good is a luxury good
  • If -Ve, the good is an inferior good
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13
Q

What is cross-price elasticity of demand (XED)?

A

It measures the responsiveness of quantity demanded of good x to a change in the price of good z

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14
Q

Cross-price elasticity of demand (XED) formula

A
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15
Q

Interpretations of cross-price elasticity of demand (XED) (2)

A
  • If +Ve, the goods are substitutes
  • If -Ve, the goods are complements
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16
Q

What is price elasticity of supply (PES)?

A

Is a measure of the responsiveness of quantity supplied to a change in the price

17
Q

Price elasticity of supply (PES) formula

A
18
Q

Interpretations of price elasticity of supply (5)

A
  • If PES = 0, supply is perfectly inelastic
  • If PES is between between 0 and 1, supply is inelastic
  • If PES = 1, supply is unit elastic
  • If PES > 1, then supply is elastic
  • If PES = infinity then supply is perfectly elastic
19
Q

What is welfare?

A

Is the health, happiness and fortress of a person or group

20
Q

Impact of price changes of welfare (2)

A
  • When prices fall, consumers benefit relative to producers
  • When prices rise, producers benefit relative to consumers
21
Q

Definition of consumer surplus

A

Is the difference between the total amount that consumers are willing and able to pay for a good or service (indicated by the demand curve) and the total amount that they actually do pay (I.e market price)

22
Q

Where is consumer surplus on a graph?

A

Is on the underside of the demand curve and above the market clearing

23
Q

Definition of producer surplus

A

Is an economic measure of the difference between the amount a producer of a good receives (I.e market price) and the minimum amount the producer is willing

24
Q

Where is producer surplus on a graph?

A

Is below the market clearing but above the supply curve

25
Q

Welfare effects after tax on a graph (2)

A
  • The square in black represents government tax revenue
  • The triangle is known as DWL (deadweight welfare loss) which is the gap between the original market clearing and the line from bottom of CS and top of PS
26
Q

Impact of Tax incidence when demand is elastic

A
  • Firms cannot pass on lots of tax by increasing prices when a product is elastic
  • The black rectangle represents government tax revenue
  • The triangle is the DWL (aka the dead weight welfare loss)
27
Q

Impact of Tax incidence when demand is inelastic

A

Firms can pass on lots of tax by increasing price as demand has small change when prices change

Introduction To Business Economics (9 decks)

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