PRICE ELASTICITY Flashcards
(25 cards)
What is Price Elasticity of Demand (PED)?
It measures the responsiveness of quantity demanded to a change in price.
What is the formula for PED?
% change in quantity demanded ÷ % change in price
What does it mean if PED > 1?
Demand is elastic – quantity demanded is highly responsive to price.
What does it mean if PED < 1?
Demand is inelastic – quantity demanded changes little with price.
What factors affect PED?
Substitutes, necessity vs luxury, time, income proportion, addictiveness.
Why is PED important to firms?
To decide pricing strategies and predict revenue changes.
What is Income Elasticity of Demand (YED)?
It measures how quantity demanded changes in response to a change in income.
What is the formula for YED?
% change in quantity demanded ÷ % change in income
What does a positive YED indicate?
The good is normal – demand rises as income rises.
What does a negative YED indicate?
The good is inferior – demand falls as income rises.
What does YED > 1 mean?
It’s a luxury good – demand is very income elastic.
What is Cross Elasticity of Demand (XED)?
It measures how the quantity demanded of one good responds to the price change of another good.
What is the formula for XED?
% change in quantity demanded of Good A ÷ % change in price of Good B
What does a positive XED mean?
The goods are substitutes.
What does a negative XED mean?
The goods are complements.
What does a high absolute XED value show?
A strong relationship between goods (strong complements or substitutes).
What is Price Elasticity of Supply (PES)?
It measures how much quantity supplied changes in response to a change in price.
What is the formula for PES?
% change in quantity supplied ÷ % change in price
What does PES > 1 mean?
Elastic supply – supply responds strongly to price changes.
What does PES < 1 mean?
Inelastic supply – supply is less responsive to price changes.
What affects PES?
Time, spare capacity, stock levels, production flexibility, ease of entry.
Why is PES important for government policy?
To predict how firms respond to taxes and subsidies.
What does PED = 0 mean?
Perfectly inelastic demand – quantity demanded doesn’t change at all.
What does PES = 0 mean?
Perfectly inelastic supply – fixed supply regardless of price.
