Elasticity Flashcards
What is price elasticity (PED)
This is the change in quantity demanded of a good caused by the change in price of the good itself
What is income elasticity (YED)
This is the change in the quantity demanded of a good caused by a change in the consumer’s income
What are normal goods
A normal good is one for which demand rises when income rises and falls when income falls e.g toothpaste, food etc. (0+) . They can be split into luxury goods and necessities
What are inferior goods
An inferior good is one for which demand rises when income falls and demand falls when income rises e.g discounted items, low quality meat. (-0)
What is a necessity good?
When the YED is between 0 and 1, the good is a necessity. E.g food and toothpaste
What is a luxury good?
When the YED is above 1, the good is a luxury. E.g television, jewellery, hotel trips
What is elastic demand?
When a product has an elastic demand, small changes in the price will lead to large changed in the quantity demanded (bigger than -1 or +1)
What is inelastic demand?
Small changes in the price will lead to small changes in the quantity demanded by consumers. (Between -1 and +1)
What is unitary demand ?
When a product has unitary demand, any change in the price will lead to the exactly same change in quantity demanded. (Exactly 1 or -1)
Look at number lines
PED formula is on pg 28 in log book
Factors influencing the PED of a product or service?
Durability: the greater the durability, the more elastic its demand will be. Consumers can postpone replacement and hold off buying until the price drops and continue to use their current product
Availability of close substitutes: the more substitutes available, the more elastic the product’s demand will be. E,g butter to margarine
Cheaper of two complements: it will usually have inelastic demand as the consumer is less concerned of the price after they’ve bought an expensive product e.g golf balls will be less responsive to change prices after the consumer has bought golf clubs
Luxury or necessity: if the good is a necessity, it’s PED will be inelastic as they are not responsive to changes in the price. If the good is a luxury it’s PED will be more elastic as they are more responsive to changes.
Brand loyalty: the more loyal a customer is to a brand, the more inelastic their demand will be to changes in the price
Expectation of future price changes: if the consumer expects prices to fall further, the more inelastic their demand will be to the current decreases in the prices
