Uses of Elasticities of Demand Flashcards
(17 cards)
What factors affect the price elasticity of demand?
Substitutes
Type of good/service
Time
Percentage of income spent on one good
How does time affect the price elasticity of demand?
In the long run demand becomes more price elastic as it becomes easier to change to alternatives.
How do substitutes affect the price elasticity of demand?
More substitutes lead to higher PED
How does the percentage of income spent on one good affect the price elasticity of demand?
Higher percentage of income products is more price elastic as consumers are more likely to shop around
What PED do essential goods have?
Price inelastic
What PED do habit forming goods have?
Price inelastic
What PED do non-postponable goods have?
Price inelastic
What PED do several different uses goods have?
Price inelastic
What happens to firms for price inelastic goods?
A reduction in price will decrease total revenue
A increase in price will increase total revenue
What happens to firms for price elastic goods?
A reduction in price will increase total revenue
Increase in price will reduce total revenue
What YED does normal goods have?
0 to 1
As income rises demand increases
What YED does luxury goods have?
YED>1
What YED does inferior goods have?
YED is negative
What does the cross elasticity of demand show?
Whether a good is a substitutes or a complements
What if a good has a positive XED?
Substitute
A fall in price for one good will reduce demand for another
What if a good has a negative XED?
Compliment
What if a good has a 0 XED?
Independent
