Elasticity Flashcards
(21 cards)
What is elasticity?
The responsiveness of X to a change in another variable.
What is the price elasticity of demand?
The responsiveness of quantity demanded of a goods to a change in its price.
What is the formula of PED?
% change in Qd / % change in P
What does PED < 1 mean?
Inelastic demand where demand isn’t particularly responsive to changes in price
What does PED > 1 mean?
Elastic demand where demand is very responsive to changes in price.
What are each of these:
PED = 0
PED = infinity
PED = 1
- Perfectly inelastic (consumers willing to pay any price for product)
- Perfectly elastic (one price at which consumers are willing to pay)
- Unitary elastic (change in price is met with a proportional change in demand)
State 3 factors that determine PED.
- Number of substitutes
- Proportion of income spent on demand
- Addictive/ habitual consumption
- Luxury or necessity
- Time
State three uses of PED
- Indication of competition faced
- Determination of pricing policy
- Price setting in price discrimination
- Government decision on which goods to tax directly
What is the cross elasticity of demand (XED)?
The responsiveness of demand for a good to a change in the price of a related good.
What is the formula for XED?
% change in demand for good A / % price of good B
State the two uses of XED
- Marketing strategies
- If a competitor changes its price, firms can work out the effect on their demand
What are substitutes and complements?
Substitutes - good that can be used in place of each other
Complements - goods that are typically consumed or used together
What is the income elasticity of demand (YED)?
The responsiveness to a change in demand to a change in income.
What is the formula for YED?
% change in demand / % change in income
State the three uses of YED
- Effect of recession/ growth on demand
- Business planning for product range
- Helps firms anticipate future demand
What is the price elasticity of supply?
The responsiveness between change in quantity supplied and change in price.
What is the formula for PES?
% change in Qs / % change in P
What does PES = infinity mean?
Perfectly elastic supply where a small change in price leads to an infinite change in the quantity supplied.
What does PES = 0 mean?
Perfectly inelastic supply where changes in price have no impact on quantity supplied.
What do the following mean?
PES > 1
PES < 1
- Supply is price elastic (firms can quickly respond to change in price)
- Supply is price inelastic (firms cannot quickly respond to change in price)
State four factors that affect the PES
- Spare production capacity
- Stocks of finished products and components
- Substitution of factors/ factor mobility
- Time period and production speed
