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Economic Theme 1 > Elastcities > Flashcards

Elastcities Flashcards

1
Q

What does elasticity of demand measure

A

Responsiveness of quantity demanded in repsonse to price, income and other goods

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2
Q

What does it mean if demand is elastic

A

Change in price will cause a larger change in demand

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3
Q

unitary elastic PED

A

= 1 = both change exactly the same

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4
Q

perfectly elastic PED

A

= infinity = small change in price causes demand to fall to 0

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5
Q

What does it mean if demand is inelastic

A

Change in price will cause a smaller change in demand

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6
Q

calculation for PED

A

Change in quantity demanded / change in Price

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7
Q

perfectly inelastic PED

A

= 0 = change in price has no effect on demand

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8
Q

Factors that influence price elasticity of demand

A

Substitutes - more substitutes makes a good more elastic
Type of goods - essential and habitual goods may be more inelastic
Percentage of income spent - larger proportion of income is more price elastic like a fridge
Time - long run demand is more elastic as it becomes easier to change to alternatives

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9
Q

Significance of PED

A

Significant in the imposition of taxes and subsidies

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10
Q

When demand is inelastic who mainly receives the tax burden

A

The consumer as the demand curve is more vertical

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11
Q

When demand is elastic who mainly receives the tax burden

A

The Producer as the demand curve is more horizontal

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12
Q

How does an taxing an inelastic demand curve affect the government

A

They receive more revenue as consumers demand for the product won’t change much

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13
Q

How does taxing an inelastic demand curve affect firms

A

Their production of the good won’t change very much so quantity won’t decrease by a lot and output will remain the same

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14
Q

What does a subsidy do to elastic goods

A

Larger change in output and smaller fall in price for consumer, larger increase in revenue, more expensive for government

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15
Q

What does a subsidy do to inelastic goods

A

Price falls a larger amount, little change in output and cheaper for the government

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16
Q

What happens to revenue with an elastic demand curve

A

decrease in price leads to increase in revenue

17
Q

What happens to revenue with an inelastic demand curve

A

decrease in price leads to decrease in revenue

18
Q

What is the calculation for YED

A

Percentage change in quantity demanded / percentage change in real income

19
Q

Inferior good YED

A

YED<0 when a rise in income leads to fall in demand

20
Q

Normal good YED

A

YED>0 when a rise in income leads to rise in demand for the good

21
Q

Luxury good YED

A

YED>1 when larger rises of income increase demand for a good

22
Q

for Income when is a good inelastic or elastic

A

Bigger than 1 = elastic
Smaller than 1 = inelastic

23
Q

Significant of YED

A
  • Important for firms to know how income changes in the country will affect their own sales
  • Can impact the type of good a firm may produce
24
Q

XED calculation

A

Percentage change in quantity demanded of good A / Percentage change in price of good B

25
Q

Substitute goods XED

A

XED>0 increase in price of B will increase demand for good A

26
Q

Complementary goods XED

A

XED<0 increase in price of good B all decrease demand for good A

27
Q

Unrelated goods XED

A

XED = 0

28
Q

Significance of XED

A

firms must be aware of their competition and complementary firms, to know how price changes will affect their own demand

29
Q

Price elasticity of supply

A

Responsiveness in supply to a change in price

30
Q

PES calculation

A

percentage change in quantity supplied / percentage change in price

31
Q

Factors that affect PES

A
  • when unemployment is high supply is more elastic as it’s easier to recruit workers
  • perishable goods have inelastic supply
  • Firms with high stockpile levels have elastic supply
  • industries with more mobile factors of production will have more elastic supply
  • working below full capacity
  • easier entry to the market makes supply more elastic
32
Q

Why is high PES important to firms

A

So firms can respond to price and demand changes quickly by making their supply elastic so it is more responsive, done through having spare production capacity.

33
Q

PES in the short run

A

Can be difficult to increase production in the short run due to a time lag as factors of production may be fixed so supply is inelastic

34
Q

PES in the long run

A

All factors of production are variable so firms can increase production capacity which makes supply more elastic

35
Q

how does an inelastic curve shift affect the change to the equilibrium point

A

greater impact on price

36
Q

how does an elastic curve shift affect the change to the equilibrium point

A

greater impact on quantity

Economic Theme 1 (7 decks)

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