L5 - Elasticity Flashcards
What is the PED?
Responsiveness of quantity demanded to change in price
How do you calculate PED?
% CHANGE IN Q DEMANDED/ % CHANGE IN PRICE
Interpret based on absolute values i.e -0.2=0.2. OPPOSITES BASICALLY
What are the determinants of PED?
Availability of close substitutes:
Goods with close substitutes tend to have more elastic demands
If there is a small price increase, buyers will switch to the alternatives
Necessities versus luxuries:
Goods that are essential tend to have less elastic demand
Definition of market (market demand versus firm demand):
Narrowly defined markets have more elastic demand than broadly defined markets. It is easier to find substitutes for a narrowly defined market
Time horizon:
Demand is more elastic when the associated time period is longer. It is easier to substitute away from a product in the long run than in the short run.
When is something elastic or inelastic?
Inelastic: PED between 0 & 1): Quantity demanded changes proportionally less than price
Elastic: (PED between 1 & ∞): Quantity demanded changes proportionally more than price
Perfectly Inelastic: 0
Perfectly Elastic: ∞
Unit Inelastic: 1
What shapes do perfectly elastic and inelastic take?
Perfectly Inelastic: Horizontal
Perfectly Elastic: Vertical
How do you use the midpoint method to find out PED?
% Change in P= Change in P/Mid point of P
% Change in Qd= Change in Qd/ Mid Qd
Minus the result from both to get PED from mid point method (I.E: %Change in Qd / % Change in P)
What is Income Elasticity of Demand (IED) and how is it calculated?
How responsive quantity demanded is to change in income
% change in Qd/ % Change in Income
How can the IED be interpreted in regards to differing types of goods?
Normal goods
quantity demanded increases with a rise in income
• For necessities: income elasticity of demand is between 0 and 1,
i.e. demand increases less rapidly than an increase in income
• For luxuries: Income elasticity of demand is greater than 1,
i.e. demand increases more rapidly than an increase in income
Inferior goods
quantity demanded decreases with a rise in income; example: buses
What is the XED and how do you calculate it?
% change in Quantity Demanded of Good A/ % Change in price of Good B
Measures how much the quantity demanded of ONE good changes if the
price of ANOTHER good changes.
How can you interpret the XED?
For substitutes: Cross-price elasticity of demand is positive,
i.e. Buyers purchase more of good A when the price of good B rises
• For complements: Cross-price elasticity of demand is negative,
i.e. Buyers purchase less of good A when the price of good B rises
What is the PES and how do you calculate it?
This measures the responsiveness of quantity supplied to price.
PES= % Change in Q supplied/ % Change in P
