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Microeconomics Year 1 > 2.6 Elasticity > Flashcards

2.6 Elasticity Flashcards

The role of markets (43 cards)

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1
Q

What is elasticity?

A

The sensitivity of one variable to changes in another variable
The extent to which buyers and sellers respond to particular change in market conditions

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2
Q

When would the demand curve be elastic?

A

Change in demand > change in price

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3
Q

When would the demand curve be inelastic?

A

Change in demand < change in price

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4
Q

What determines if something is a price elastic good?

A

If there’s close substitute, if it’s a luxury, the higher the prop. of income a product takes up the more elastic and if it has a long time period under consideration

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5
Q

What determines if something is a price inelastic good?

A

If there’s no substitute, if it’s a necessity, the less the prop. of income a product takes up the more inelastic and if it has a short time period under consideration

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6
Q

What is the price elasticity of demand (PED)?

A

The responsiveness of the quantity demanded to a change in the price of a good/service

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7
Q

What’s the equation for PED?

A

%Δ quantity demanded
/
%Δ price

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8
Q

What will the PED always be?

A

Negative

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9
Q

When will the PED be smaller than -1?

A

If the %Δ in QD is larger than %Δ in price (therefore it’s elastic)

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10
Q

When will the PED be between 0 and -1?

A

If the %Δ in QD is smaller than the %Δ in price (therefore it’s inelastic)

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11
Q

What is the PED is exactly -1?

A

It’s proportional

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12
Q

What is total revenue?

A
  • price x quantity sold
  • The total money a firm receives from selling goods/services
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13
Q

What is income elasticity of demand (YED)?

A

How responsive quantity demanded is following a change in consumer income

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14
Q

What’s the equation for YED?

A

%Δ quantity demanded
/
%Δ income

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15
Q

What happens if the YED is positive or negative?

A

Positive: normal good (increase in demand when income goes up) e.g. clothing, electronics
Negative: inferior good (decrease in demand when income goes up) e.g. store brand products, public transport

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16
Q

For YED, when is a good an elastic inferior good?

A

If the YED value is below -1. Curve has negative gradient almost perfectly horizontal

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17
Q

For YED, when is a good an inelastic inferior good?

A

If the YED value is between -1 and 0. Curve has negative gradient almost perfectly vertical

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18
Q

For YED, when is a good an inelastic normal good?

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A

If the YED value is between 0 and 1. Curve has positive gradient almost perfectly vertical

19
Q

For YED, when is a good an elastic normal good?

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A

If the YED value is above 1. Curve has positive gradient almost perfectly horizontal

20
Q

What factors determine the value of YED?

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A
  • Level of income (higher income, more inelastic)
  • Availability of substitutes (few substitutes, demand is not sensitive to change)
  • Degree of necessity (necessary: normal inelastic)
21
Q

What is cross elasticity of demand (XED)?

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A

The responsiveness of quantity demanded for one good/service in relation to a change in price of some other good/service

22
Q

What’s the equation for XED?

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A

%Δ price of product B

23
Q

What does a positive and negative XED suggest?

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A

Positive suggests a substitute relationship (increase in price of B would increase in demand of A)
Negative suggests a complimentary relationship (increase in price B would decrease in demand of A)

24
Q

What does it mean if the value of the XED is close to 0?

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A

The products have weak complimentary

25
For XED, when do the two goods have a strong compliment?
XED value < 0 and far from 0
26
For XED, when do the two goods have a weak compliment?
XED is between -1 and 0
27
For XED, when do the two goods have a weak substitute?
XED value is between 0 and 1
28
For XED, when do the two goods have a strong substitute?
XED value > 1
29
How to show XED on a graph?
Y axis is price of good B, X axis is quantity demanded of good A. Showing the more elastic the graph, the stronger the relationship and the more inelastic the graph, the weaker the relationship
30
What is the price elasticity of supply (PES)?
The responsiveness of the quantity supplied to a change in the market price
31
What's the equation for PES?
%Δ quantity supplied --------------------------------------- %Δ price
32
What will the PES always be?
Positive
33
What makes the PES elastic?
More stock available, the product can be stored, the industry has more spare capacity, there's more availability of factors of production, short production process and lasts for the long run
34
What makes the PES inelastic?
Less stock available, the product can't be stored, the industry has less spare capacity, there's less availability of factors of production, long production process and lasts only for the short run
35
Why is PED useful to a firm?
- Forcast the impact of a change in price on sales volume/revenue - Allows firms to know how to price their products e.g. pricing train tickets different based on times (price discrimination) - Can focus on advertising rather than increasing/decreasing price (non-pricing policy)
36
What problem is there to firms when using PED?
Cannot assume other firms won't do the same
37
What's happening to people's real disposable income over time (YED)?
It's increasing so people will spend more on income elastic normal goods, therefore firms with positive YED will do well in the future
38
What will happen to demand for income elastic products (YED)?
It will fall, therefore demand for inferior income inelastic goods will increase
39
For XED, what could businesses do with complimentary goods?
- Bundle them e.g. selling meal deals - Take over businesses selling the compliments
40
How is XED useful for firms?
It helps anticipate changes in demand if prices of others are changing Helps firms realise who their competition is in the market and whether their products are substitutes or complimentary.
41
What's the effect of PED on the impact of an indirect tax e.g. sugar tax?
If the tax is elastic, it's more effective. If the tax is inelastic, it's less effective
42
What's the effect of PED on the impact of a subsidy e.g. windfarm investment?
If the subsidy is elastic, it's more effective. If the subsidy is inelastic, it's less effective.
43
How would the government collect the data to measure each elasticity?
PED + YED: consumer surveys XED: competitor analysis PES: past company records

Microeconomics Year 1 (14 decks)

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