2.5 Elasticities Flashcards
What does PED measure?
The responsiveness of quantity demanded to a change in price
What is PED?
Price elasticity of demand
What is YED?
Income elasticity of demand
How do you calculate PED?
% change in the quantity demanded of a good / % change in price of good
PED is ALWAYS _______
Negative:
(due to the law of demand, if price increases, qty demanded decreases, the price OR the qty demanded will ALWAYS be NEGATIVE = negative PED)
What does a [PED > 1] mean?
The demand for the product is price elastic. In other words, the % change in price causes a larger proportionate % change in quantity demanded.
What does a [0 < PED < 1] mean?
The demand for the product is price inelastic. In other words, consumers are unresponsive to change in price. ie. the % change in quantity demanded is smaller than the % change in price
What does a [PED = 1] mean?
The demand is unit elastic.
ie the % Quantity demanded = % Price
What does a [PED = 0] mean?
The demand is perfectly inelastic there is no change in quantity demanded, no matter what the price is. This suggests the firm has no substitutes.
What does a [PED = ∞] mean?
If PED is infinity, quantity demanded only exists at price P. If the firm increases its price, quantity demanded drops to 0. As consumers will switch to substitutes.
What does “Inelastic” mean?
consumers are INSENSITIVE
What are the determinants of PED?
TINS:
- Time
- Proportion of income spent on a good
- Degree of necessities
- Number and closeness of substitutes:
How does “Time” affect PED?
Time is a key determinant of PED. Over time the demand for a product tends to be more price elastic as consumers have more time to look for substitutes or change their tastes and preferences.
How does “Proportion of income spent on a good” affect PED?
The higher the proportion of income spent on a good, the more price elastic the good is, ceteris paribus
How does the “Degree of necessities” affect PED?
If you regard a product as essential the demand for the product will be price inelastic. Eg. water or an addictive substance (cigarettes) will be price inelastic, but a luxury such as a yacht will be price elastic.