Elasticity Flashcards
(20 cards)
What is the definition of elasticity?
Elasticity is a measure of the responsiveness of demand to a change in a variable.
What are the determinants of price elasticity of demand(PED)?
S-substitutes(how many)
P-percentage of income(How much the product costs in comparison to income)
L-luxury good or necessity
A-addiction
T-Time
How do you calculate PED?
PED=%change in demand / %change in price
-The value will always be negative as when price rises demand falls
What does is mean if PED is 0 (perfectly inelastic)?
if a products PED is perfectly inelastic a price rise would mean there is no change in demand
What does it mean if PED is 1(unitary)?
If PED is unitary this means a change in price would result in the same change in demand
What does it mean if PED is infinity(perfectly elastic)
If the PED of a product is perfectly elastic this means any increase in price would kill demand
What does income elasticity measure?
Measures the responsiveness of demand to a change in income
How do you calculate income elasticity of demand(YED)?
YED=%change in quantity demanded / %change in income
What does a positive value of YED mean?
A positive value means the good is a normal good as demand would go up with income
What does a negative value mean for YED?
A negative value means the good is an inferior good as if the income goes up the demand would go down
What is cross elasticity of demand (XED)?
XED measures the responsiveness in demand of one good after a change in price of another good
How do you calculate cross elasticity of demand(XED)?
% change in quantity demanded of good A / % change in price of Good B
What does a negative value mean for Cross elasticity of demand (XED)?
A negative sign(-) means a compliment as if the price of good B goes up the demand of good A goes down
What does a positive value mean for cross elasticity of demand (XED)?
A positive sign(+) means a substitute, if price of good B goes up good A will go up in demand
-The further away from one the closer the substitute
What does price elasticity of supply (PES) measure?
PES measures the relationship between change in quantity supplied and a change in price
-There will be a positive correlation due to profit motive so it will always be a positive value
How do you calculate price elasticity of supply(PES)?
PES=change in quantity supplied / change in price
What does it mean if PES is infinity (perfectly elastic)?
If PES is perfectly elastic this means they can produce whatever the like at a certain price.
-E.g. Spotify as the software is already there
What does it mean if PES is 0 (perfectly inelastic)?
A PES of 0 means if price goes up the cant supply more in the short run.
What are the determinants of elasticity of supply (PES)?
B-barriers to entry
R-raw materials (availability)
I-inventory (stock)
T-time
S-spare capacity (how much)
