Year 1 Microeconomics - Elasticity Flashcards
what is ped
measures the responsiveness of quantity demanded given a change in price
ped equation
- difference/ original x 100
- percentage change in quantity demanded / percentage change in price x 100
what are the laws of PED
- less than 1, demand is price inelastic
- greater than 1, demand is price elastic
- zero , demand is perfectly price inelastic
- infinity - demand is perfectly price elastic
- one - demand is unit price elastic
when are goods price inelastic/elastic
SPLAT
Substitutes - the more substitutes there are, the more price elastic demand will be, vice versa
Percentage of income - the greater the percentage of income that a price change takes, the more elastic demand is gonna be, vice versa
Luxury or necessity? luxury tends to have more price elasticity whilst necessities are more inelastic
Addictive? Habit forming? - demand may fall but not by a lot even if the price is increased, inelastic
what is total revenue
price x quantity sold
if a firm has a price elastic good, what would they do
- whatever they do with price, the opposite will happen with total revenue
- increased price, TR falls as an increased price means lower quantity demanded, vice versa
if a firm has a price inelastic good, what would they do
- whatever they do with the price, the same will happen to total revenue
- eg increased price, increased TR, decreased price , decreased TR
what is price elasticity of supply
measures the responsiveness of quantity supplied given a change in price
PES equation
percentage change of quantity supplied / percentage change in price
PES laws
- greater than 1 - supply is price elastic
- less than 1 - supply is price inelastic
- 0 - supply is perfectly price inelastic
- infinity - price is perfectly price elastic
- 1 - supply us unit price elastic
factors that effect supply elasticity
Production lag - the longer the production lag, the more inelastic supply will be, as it would be hard to increase production
- storage - goods that can be stored easily without loss of quality are more PES elastic
- technological advances - technology can make production more efficient and flexible, increasing the PES
- spare capacity - firms with unused capacity can increase output if prices rise. if they are already operating at full capacity, it would be hard to increase output
- the ease of access to raw materials. if inputs are readily available and can be easily increased , PES more elastic
- flexibility of production - if a firm can easily switch between producing different goods, supply is more elastic
what is XED
measures the responsiveness of quantity demanded of a good/service given a change in price of another
XED equation
percentage change in quantity demanded of good A / percentage change in price of good B
how can we tell from XED if two goods are substitutes or complements
negative XED - complements
positive XED - substitutes
laws of XED
- greater than one - demand between the goods is price elastic
- less than one - demand between the goods is price inelastic
- 0 - demand between the goods is perfectly price inelastic
What is income elasticity of demand?YED
It measures the responsiveness of quantity demanded given a change in income
YED equation
Percentage change in quantity demanded / percentage change in income
How to tell if a good is normal or inferior using YED
Positive is normal negative is inferior
YED laws
- greater than 1 - income elastic - NORMAL LUXURY
- ## less than 1 - demand is income inelastic - normal necessity
INFERIOR
- greater than 1 , demand is income elastic
- less than one , demand is income inelastic
- 0 - demand is perfectly income inelastic
why is PED important for firms
- important for businesses when making pricing decisions for total revenue
- employment, level of stock and output
why is PES important for businesses
- allows firms to find ways to make supply price elastic
why is XED for businesses
- important from pricing decisions - eg if a company is making complements, they can reduce the price of the first good, increase the price of the other
- non price competition - eg if a firm is making substitues, may consider cutting price/ but may cause price wars (look at non price competition
- employment, stocks , output
why is YED good for businesses
pricing decisions - planning for recessions and goods
eg, a firm selling a normal good may increase prices in a boom and may expect an increase in demand so will increase employment
limitations of elasticity
- elasticity figures are only estimates, data collected from surveys, competitors, or past data
- they assume ceteris paribus, there are other factors which affect demand and supply
- PED varies along the demand curve - for a business, they can’t keep changing their price by the same amount and expecting the same impact on quantity demanded
weak vs strong substitutes xed
If goods are weak substitutes, there will be a low cross elasticity of demand.
Example, if the price of The Daily Mail increases 10%, the demand for the Financial Times may only increase by 1%. Therefore, the cross elasticity of demand is 0.1. These two newspapers are weak substitutes.
If two goods are close substitutes, there will be a high cross-elasticity of demand.
Example, if the price of Sainsbury’s flour increases 10%, demand for Hovis flour may increase by 20%. To consumers, there is little difference between the two goods. Therefore, the cross elasticity of demand is +2.0
