Elasticity Flashcards
What is elasticity?
A measure of the responsiveness of a quantity demanded to a quantity supplied based on a determinant
PED?
Measures the amount of quantity demanded of a good or items responds or changes based on the change in price.
PED - elastic , inelastic?
Elastic - quantity demanded would respond substantially in a change in price.
Inelastic - quantity demanded would respond only slightly to a change in price.
Determinants of PED
• Necessities ( IE) vs luxuries (E).
• Availability of close substitutes - close substitutes (E) no close substitutes ( IE).
•Level of advertising.
• Habit forming- is it addictive?
• Degree of brand loyalty.
Types of elasticity
Infinity - perfectly elastic
> 1 - relatively elastic
1 - unitary elastic
< 1 - inelastic
0 - perfectly inelastic
Total revenue?
Price X Quantity.
The amount paid by buyers and received by sellers of a good.
Total revenue - affected by a good being elastic or inelastic?
Elastic means that an increase in price will in turn yield a decrease in total revenue.
Inelastic means an increase in price will yield an increase in total revenue.
Unitary means that an increase in price will not change TR .
YED?
Income elasticity of demand,
A measure of how much the QD of a good changes in response to a change in consumer income levels.
How are necessities, luxuries and inferior goods affected by income?
Necessities: increase income means an increase in QD ( IE )
Luxuries : increase income means increase in QD ( E )
Inferior goods: increase in income means decrease in QD.
YED formula?
% change in QD / % change in Y
Y = income.
Types of YED
High - A rise in income means bigger increases in QD.
Unitary - Rise in income is proportionate to increase in QD.
Low - A rise in income is less than proportionate to increase in QD.
0 - QD is the same even if income changes.
Negative - An increase in income comes with a decrease in QD.
What is PES?
Measures the responsiveness of a QS of a good or service to a price change
PES formula?
% change in QS / % change in P
Determinants of PES?
• Availability of factors of production such as if greggs wanted more sausage for their rolls it is easily and quickly available.
• Level of stock held. Such as Jaguar land rover have carparks full of completed vehicles, PES will be R E.
•Spare capacity in production. Such as if the firm Worcs Bosch operated 3 days a week, they can increase production relatively quickly going to 5/6 days a week.
• Length & Complexity of production process. Longer firms must adjust and therefore are more elastic.
Factors of Production PES.
LAND
LABOUR
CAPITAL
ENTREPRENEURSHIP
