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IB Economics > Unit 3 Elasticity > Flashcards

Unit 3 Elasticity Flashcards

1
Q

Price Elasticity of Demand (PED) formula

A

percentage change in quantity demanded/percentage change in price

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2
Q

elasticity

A

the measurement of how reactive and responsive one variable is when another changes

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3
Q

Price Elasticity of Demand (PED)

A

a percentage measure of the responsiveness of the quantity of a good demanded to changes in its price

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4
Q

why PED is always negative

A

law of demand states that quantity demanded changes inversely to price, downward slope

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5
Q

change in quantity demanded formula

A

Qd(new) - Qd(old)/Qd(old) x 100%

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6
Q

change in price formula

A

P(new) - P(old)/P(old) x 100%

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7
Q

PED < 1

A

demand is relatively inelastic

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8
Q

PED < 1

A

demand is relatively elastic

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9
Q

PED = 1

A

demand is unit elastic

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10
Q

PED = 0

A

demand is perfectly inelastic (theoretical extreme)

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11
Q

PED = infinity

A

demand is perfectly elastic (theoretical extreme)

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12
Q

determinants of PED

A

number/closeness of substitutes, demand within product groups, proportion of income spent on the good, addiction, degree of necessity, advertising , time period

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13
Q

total revenue

A

the income received from selling a product

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14
Q

TR formula

A

P x Q

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15
Q

effect of price increase on total revenue when PED > 1

A

TR falls

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16
Q

effect of price increase on total revenue when PED = 1

A

TR stays the same

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17
Q

effect of price increase on total revenue when PED < 1

A

TR rises

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18
Q

effect of price increase on total revenue when PED < 1

A

TR rises

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19
Q

effect of price decrease on total revenue when PED > 1

A

TR rises

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20
Q

effect of price decrease on total revenue when PED = 1

A

PED stays the same

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21
Q

effect of price decrease on total revenue when PED < 1

A

TR falls

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22
Q

commodities/primary products

A

inelastic products that do not have many substitutes

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23
Q

examples of commodities/primary products

A

agricultural goods, oil, minerals

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24
Q

YED formula

A

percentage change in quantity demanded/percentage change in income

25
YED
the responsiveness of the quantity demanded of a good to a change in income
26
positive YED
normal good
27
negative YED
inferior good
28
YED > 1
income elastic
29
0 < YED < 1
income inelastic
30
normal good
when income increases, demand for normal goods increases, when income decreases, demand for normal goods decreases
31
inferior good
when income increases, demand for this good falls, and when income decreases, demand for this good rises
32
YED = 0
no response to income change
33
Engel curve (Ernst Engel)
illustrates the relationship between consumer demand and household income
34
what the engel curve shows
a continuum: at very low incomes, certain goods may be deemed a luxury, as income increases it becomes a necessity, and finally at high levels of income the same good becomes inferior
35
as income rises (necessities)
people buy more food but the proportion of income spent on food increases more slowly than income
36
as income rises (luxuries)
quantity demanded rises faster than income, the proportion of income spent on such goods increases faster than income
37
importance of YED for firms
sales forecasting, pricing policy, diversification
38
sales forecasting
a firm can forecast the impact of a change in income on sales volume and revenue
39
pricing policy
knowing YED helps firms decided whether to raise or lower prices following a change in consumer incomes
40
diversification
firms can diversify and offer a range of goods with different YEDs to encourage positive economic growth and development
41
importance of YED in explaining changes in the sectoral structure of the economy
as economies grow, their sectoral structure expands from primary to secondary to tertiary production and incomes rise, so there is more demand for manufactured goods and services
42
Price Elasticity of Supply (PES)
measures the responsiveness of quantity supplied of a product following a change in its price along a given supply curve
43
PES is always _____
positive
44
Price Elasticity of Supply (PES) formula
percentage change in quantity supplied/percentage change in price
45
PES > 1
supply is price elastic
46
PES < 1
supply is price inelastic
47
examples of products which have price elastic supply
mass-produced goods, carbonated soft drinks, toothpaste
48
examples of products which have price inelastic supply
goods which are difficult to supply, fresh fruit and vegetables that take time to grow
49
PES = 1
unitary price (curve starts at the origin)
50
PES = 0
supply is perfectly price inelastic; change in price has no impact on the quantity supplied, as there is no spare capacity to raise output
51
examples of PES = 0
demand-priced concert tickets, football stadium with limited seat capacity
52
PES = ∞
supply is perfectly price elastic; supply can change without any change in price due to the spare capacity that exists at the current price level, theoretical
53
examples of PES = ∞
a huge stock of Duracell batteries, any increase in demand will result in more supply without the price being risen
54
determinants of PES
time, closeness of producer substitutes, unused capacity, storability, stocks, rate at which costs related to producing more increases
55
graph of PES = 0
vertical
56
graph of PES = ∞
horizontal
57
the longer the time period,
the larger the PES
58
ways firms can improve the value of their PES
create spare capacity, keep large volumes of stocks, improved storage systems to prolong the shelf-life of products, upgrade technology, training employees to improve labor capacity
59
application of PES
people do not like investing in products that have unstable supply, industries that produce primary commodities are risky because they have larger demand shifts

IB Economics (4 decks)

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