Elasticity Flashcards
define price elasticity of demand
measures responsiveness of quantity supplied given a change in price
what demands the elasticity of demand
- production lag= long lag= hard to increase production= inelastic
- stocks= big stocks= elastic
- big spare capacity= more elastic= can use spare capacity to increase supply
- time
- substitutability of FOPs= easier to respond to changes= price elastic
- availability of substitutes= more subs= more elastic= more choice for consumers
- cost of switching= e.g. cost of changing mobile contract= less price elastic
- degree of necessity= highly necessary like medicine or insulin= inelastic
- brandy loyalty= inelastic= don’t care about price instead product brand
- time frame= if there more time to search online for cheaper sub= elastic
how to workout PES
%change in QS/ %change in P
define price elasticity of demand
measures responsiveness of quantity demanded given a change in price
define inelastic demand
when prices change, demand and consumers buying habits stay the same
define cross elasticity of demand
measures responsiveness of Q demanded of a good given a change in prices of another
XED formula
% change QD of good A/ % change price of good B
what happens if XED is positive
2 goods are substitute goods
define income elasticity of demand
measures responsiveness of Q demanded given a change in income
YED formula
%change QD/ %change income
what determines PES
- production lag= longer lag= harder to respond to demand changes by increasing production if there’s a long lag= inelastic
- levels of stocks= larger level= more price inelastic
- large spare capacity= more price elastic= if P or AD increases, firm can utilise spare capacity to increase Q
- high substitutability of FOP= easier to respond by increasing production when P or AD goes up= more price elastic
- time period= SR, supply is price inelastic= fixed FOP= hard to increase production due to fixed FOP
