Elasticity Revision :) Flashcards
What is PED ? ( Price elasticity of demand )
Measures the responsiveness of demand to a change in the price of a good .
What is XED ? ( Cross elasticity of demand )
Measures the responsiveness of quantity demanded in good A , to a change in another good
E.G complimentary products
What is YED ? ( Income elasticity of demand )
Measures the responsiveness of quantity demanded due to a change in income
What is PES ? ( Price elasticity of supply )
Measures the relationship between change in quantity supplied following a change in price
What is the PED equation ?
% change in quantity demanded / % change in the price of a good
What is the XED equation ?
% change in good X’s quantity / % change in good Y’s price
What is the YED equation ?
% change in quantity demanded / % change in income
What is the PES equation ?
% change in quantity supplied /
% change in price
What do each values mean when you find the answer using the equations
0 = Perfectly inelastic
0<1 = Inelastic
> 1 = Elastic
Infinity = Perfectly elastic
How is YED affected by certain types of goods ?
Normal goods have a positive YED since as incomes increase , the quantity demanded increases
Inferior goods have a negative YED since as incomes increase , demand decreases ( E.g own brand cereal , flights , clothing )
How is XED affected by certain types of products ?
Substitutes have a positive XED - since if other products are better ( more expensive ) people are more likely to buy the other one as it is better
Complimentary goods have negative XED - since as both products go hand in hand , they are less likely to be affected by changes in price
:)
: )
What do we expect to see when there is an increase / decrease in the price of a good ?
If price goes up - then we expect to see a decrease in demand in elastic goods and a marginal decrease in inelastic goods
If price goes down - then we expect to see an significant increase of demand for elastic goods and a marginal increase in inelastic goods
There is an inverse relationship between price and demand
What does perfectly inelastic mean ?
It means that demand does not change with any alterations to price
What are some factors that affect PED?
Number of close substitutes
Necessity of the product
Peak and off peak demand
Uniqueness of the product
What do normal necessities, goods and luxuries have ?
Normal - low but positive YED
Luxuries - high positive YED
If following an increase in income more of the good is demanded . Then the good is a normal good
Factors that affect demand ?
Price
Fashion
Scarcity
Income
Substitutes and compliments
Price of other goods
What are some causes for a shift in the demand curve ?
Changes in production costs
Tax + Subsides
Changes of supplier objectives
Prices of substitutes
What are the values for PED ?
PED = 0 demand is P in ELASTIC
PED 0-1 demand is inelastic
PED = 1 demand is elastic
PED greater than 1 - perfectly elastic
What happens to substitutes and compliments when price changes
Substitutes - customer demand heavily switches when there is a small change in price
Stay the same
What are close and weak substitutes
Close substitutes - a small rise in ones price will increase demand for another product substitute
Weak substitutes - a large rise in price leads to a small rise in demand for another
Weak Substitutes- inelastic
Close substitutes - elastic
PES VALUES
PES > 1 supply is elastic
PES < 1 supply is inelastic
PES = 1 supply is perfectly inelastic
PES is greater = supply is perfectly elastic
