elasticities Flashcards
(19 cards)
What is price elasticity of demand (PED)?
The responsiveness of the quantity demanded of a good to a change in its price.
Formula for Price Elasticity of Demand (PED)?
PED= %ChangeinQuantityDemanded/% Change in price
What does it mean if PED > 1?
Demand is elastic – consumers are relatively responsive to price changes.
What does it mean if PED < 1?
Demand is inelastic – consumers are less responsive to price changes.
What does it mean if PED = 1?
Demand is unitary elastic – the percentage change in quantity demanded is exactly equal to the percentage change in price.
Factors that affect PED?
Availability of substitutes
Necessity vs. luxury
Time period
Proportion of income spent
Brand loyalty
What is income elasticity of demand (YED)?
The responsiveness of the quantity demanded of a good to a change in income.
Formula for Income Elasticity of Demand (YED)?
YED= %ChangeinQuantityDemanded/
%ChangeinIncome
What does it mean if YED > 1?
The good is an inferior good – demand decreases as income rises.
What is cross-price elasticity of demand (XED)?
The responsiveness of the quantity demanded of one good to a change in the price of another good.
Formula for Cross-Price Elasticity of Demand (XED)?
XED= %ChangeinQuantityDemandedofGoodX/%ChangeinPriceofGoodY
What does it mean if XED > 0?
The goods are substitutes – as the price of one good rises, the demand for the other good increases.
What does it mean if XED < 0?
The goods are complements – as the price of one good rises, the demand for the other good falls.
What is price elasticity of supply (PES)?
The responsiveness of the quantity supplied of a good to a change in its price.
Formula for Price Elasticity of Supply (PES)?
PES= %ChangeinQuantitySupplied/
%ChangeinPrice
What does it mean if PES > 1?
Supply is elastic – producers can increase supply quickly in response to price increases.
What does it mean if PES < 1?
Supply is inelastic – producers cannot increase supply quickly in response to price increases.
Factors affecting PES?
Time period (short-run vs long-run)
Spare capacity
Mobility of factors of production
Ease of increasing production
What is the relationship between elasticity and revenue?
Elastic demand: Price increase decreases total revenue.
Inelastic demand: Price increase increases total revenue.
Unitary elastic demand: Price change has no effect on total revenue.
