Elasticity Flashcards
(25 cards)
What is the Price Elasticity of Demand (PED) & What is the Formula?
The responsiveness of quantity demanded of a good to a change in its price
PED =
% change in quantity demanded
_______________________________
% change in price
Is PED Positive or Negative?
Negative
Because the quantity demanded is inversely related to price
What does Inelastic Demand mean?
Quantity demanded is not responsive to price changes
Value is between 0 and -1
What does Elastic Demand mean?
Quantity demanded is very responsive to price changes
Value is between -1 and -∞
When Unitary Demand is in place, is PED -1 or 1?
PED = -1
The % change in Qd is the same as the % change in P
What PED is -♾️?
Perfect Elasticity or Inelasticity?
Perfect Elasticity
What PED is 0?
Perfect Elasticity or Inelasticity?
Perfect Inelasticity
Whats the link Between PED and Total Revenue?
When PED is elastic:
• a rise in P leads to a more than proportionate fall in Qd, so TR falls
• a fall in P leads to a more than proportionate rise in Qd, so TR rises
When PED is inelastic:
• a rise in P leads to a less than proportionate fall in Qd, so TR rises
• a fall in P leads to a less than proportionate rise in Qd, do TR falls
When PED is unitary:
TR will not change when price changes
Factors influencing PED?
• Availability of close substitutes
• Cost of switching suppliers
• Breadth of product definition
• Degree of necessity
• Time frame when making choice
• Brand loyalty
• %of income spent on product
• Habitual demand
What is the Income Elasticity of Demand (YED) & What is the Formula?
The responsiveness of demand for a good to a change in income
YED =
% change in demand
——————————
% change in income
What is Cross Elasticity of Demand (XED) & What is the Formula?
the responsiveness of demand for Good A to a change in the price of Good B
XED =
% change in demand for good A
—————————————
% change in price of good B
YED is _______ for normal goods
YED is ______ for inferior goods
-
Positive
(when income rises, the Qd increases) -
Negative
(when income rises, the Qd decreases)
What are Normal Goods?
Products or services for which demand increases as consumer income rises.
• When people’s incomes go up, they tend to buy more of these goods.
• Examples of normal goods include restaurant meals, vacations, and higher-end electronics.
What are Inferior Goods?
Products or services for which demand decreases as consumer income rises.
• When people’s incomes increase, they typically buy less of these goods and may shift to higher-quality alternatives.
• Examples of inferior goods often include lower-quality or generic foods, used or older- model cars, and certain low-cost, generic products.
XED is _______ for substitute goods
Positive
(When price of good B rises, the
demand for good A increases and vice versa)
XED is _______ for complementary goods
Negative
(when the price of good B rises,
the demand for good A decreases and vice versa)
What are Substitutes?
Goods that can be used in place of each other to satisfy a similar need or desire
eg tea and coffee
What are Compliments?
Goods that are typically consumed or used together because they enhance each other’s value
eg tennis rackets and tennis balls
Uses of YED?
• Effect of recession/growth on
demand
• Business planning for product
range
• Helps firms anticipate future
demand
Uses of XED?
• Marketing strategies, eg
selling complements together
/ in bundles
• If a competitor changes its
price, firms can work out the
effect on their demand
Uses of PED?
• Determination of pricing policy/impact on revenue
• Indication of competition faced (number/closeness of substitutes)
• Price setting in price discrimination
• Government decision on which goods to tax indirectly
What is Price Elasticity of Supply (PES) & What is the Formula?
The responsiveness of Supply of a good to a change in its Price
PES =
% change in quantity supplied
———————————
% change in price
Is PES Positive or Negative?
Positive
Value of Inelastic Supply & Perfectly Inelastic? (PES)
Inelastic supply:quantity supplied is not responsive to price changes; the % change in Qs is less than the % change in P; value lies between 0 and +1.
Perfectly inelastic supply: PES = 0
