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IB Economics > 2.5 Elasticities > Flashcards

2.5 Elasticities Flashcards

1
Q

What does PED measure?

A

The responsiveness of quantity demanded to a change in price

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2
Q

What is PED?

A

Price elasticity of demand

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3
Q

What is YED?

A

Income elasticity of demand

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4
Q

How do you calculate PED?

A

% change in the quantity demanded of a good / % change in price of good

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5
Q

PED is ALWAYS _______

A

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)

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6
Q

What does a [PED > 1] mean?

A

The demand for the product is price elastic. In other words, the % change in price causes a larger proportionate % change in quantity demanded.

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7
Q

What does a [0 < PED < 1] mean?

A

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

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8
Q

What does a [PED = 1] mean?

A

The demand is unit elastic.
ie the % Quantity demanded = % Price

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9
Q

What does a [PED = 0] mean?

A

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.

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10
Q

What does a [PED = ∞] mean?

A

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.

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11
Q

What does “Inelastic” mean?

A

consumers are INSENSITIVE

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12
Q

What are the determinants of PED?

A

TINS:

  • Time
  • Proportion of income spent on a good
  • Degree of necessities
  • Number and closeness of substitutes:
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13
Q

How does “Time” affect PED?

A

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.

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14
Q

How does “Proportion of income spent on a good” affect PED?

A

The higher the proportion of income spent on a good, the more price elastic the good is, ceteris paribus

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15
Q

How does the “Degree of necessities” affect PED?

A

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.

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16
Q

How does the “Number and closeness of substitutes” affect PED?

A

The greater the number of substitutes the more price elastic the demand for the product is

17
Q

How do you calculate YED?

A

% change in quantity demanded / % change in income

18
Q

What does YED measure?

A

The responsiveness of quantity demanded to a change in income

19
Q

What is the type of good when the YED is NEGATIVE?

A

the good is an inferior good (higher the income, lower demand for good)

20
Q

What is the type of good when the YED is POSITIVE?

A

the good is a normal good (higher the income, higher demand for good)

21
Q

What does YED being GREATER than 1 mean?

A

income elastic demand for the good (eg. luxuries)

22
Q

What does YED being SMALLER than 1 mean?

A

income inelastic demand for the good (eg. necessities)

23
Q

What do “Engel” Curves show?

A

Engel curves are used to show the relationship between real income (y axis) and quantity demanded (x axis)

24
Q

What kind of slope do normal goods have on the Engel Curve?

A

A positive slope

25
Q

What kind of slope do inferior goods have on the Engel Curve?

A

A negative slope

26
Q

Which type of good is shown on this Engel Curve?

A

Luxury good, As income increases, quantity demanded increases even more

27
Q

Which type of good is shown on this Engel curve?

A

Necessity good, income increase/ decreases is SMALLER than the change in quantity demanded

28
Q

Which type of good is shown on this Engel curve?

A

Inferior good, as income increases, the quantity demanded falls

IB Economics (41 decks)

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