Econ 1 Chapter 3

Front 1

Measures the sensitivity of a quantity demanded of a product to a change in its own price...

Back 1

Price elasticity of demand

Front 2

Equation for PED

Back 2

% change in QD/

% change in P

Front 3

When demand is price inelastic, where will the value of PED be between?

Back 3

0 and 1

Front 4

When will the value of PED be greater than 1?

Back 4

When demand is price elastic

Front 5

PED=1

Back 5

Unit elastic

Front 6

PED=0

Back 6

Perfectly inelastic

Front 7

PED = infinity

Back 7

Perfectly elastic demand

Front 8

What is this an example of?

Back 8

Relatively price elastic

Front 9

Total revenue

Back 9

Value of goods sold by a firm, calculated by P X Q sold

Front 10

5 factors that influence PED

Back 10

1) availability of substitutes - if substitutes available, strong incentives to shift to these if price of product rises - substitutes= demand elastic

2) proportion of income spent on product - small % = demand inelastic, large % = demand elastic

3) nature of product - addictive (alcohol) demand inelastic

4) durability of product - long wearing = demand elastic, non durable = demand inelastic

5) length of time - takes time for consumers to adjust their expenditure patterns - demand more elastic in short run then long run

Front 11

Which one is correct?

A) products are elastic

B) demand for a product is elastic

Back 11

B

Front 12

4 points of significance for firms

Back 12

1) The effect of change in price on total revenue & expenditure on product.

2) price volatility in market following changes in supply – important for commodity producers who suffer price and revenue shifts from different time periods

3) change in an indirect tax on P&Q demanded, also whether the business is able to pass on some or all of the tax onto the consumer.

4)Information on PED can be used by a business as part of a policy of price discrimination- supplier decides to charge different prices for the same product to different segments of the market e.g. peak and off peak rail travel

Hint 12

CPIP

Front 13

When will businesses usually charge a higher price to consumers?

Back 13

When demand is inelastic

Front 14

4 points of significance for firms

Back 14

1) The effect of change in price on total revenue & expenditure on product.

2) price volatility in market following changes in supply – important for commodity producers who suffer price and revenue shifts from different time periods

3) change in an indirect tax on P&Q demanded, also whether the business is able to pass on some or all of the tax onto the consumer.

4)Information on PED can be used by a business as part of a policy of price discrimination- supplier decides to charge different prices for the same product to different segments of the market e.g. peak and off peak rail travel

Front 15

What is 3 significance points for governments?

Back 15

1) can determinate rate of foreign exchange which is based on the elasticity of imports and exports, based on elasticity of imports and exports.

2) max tax revenue, increase tax on demand price inelastic products (cigarettes), consumers bear most of tax burden

3) May tax products and services whose demand is price elastic, producers bear higher proportion of tax burden

Front 16

Cross elasticity of demand

Back 16

Sensitivity in demand for one product to a change in price of another product

Front 17

Difference between PED and XED

Back 17

XED deals with more than one product

Front 18

Difference between PED and XED

Back 18

XED deals with more than one product

Front 19

Formula for measuring XED

Back 19

% change in QD of product Y / % change in P of product X

Front 20

1) + sign XED =

2) - sign XED =

Back 20

1) Products are substitutes

2) Products are compliments

Front 21

What will a rise in price of a substitute do?

Back 21

Increase in demand for the other

Front 22

What will a decrease in price for a complement do?

Back 22

Increase in demand for the other

Front 23

What are in joint demand?

Back 23

Complements

Front 24

XED is useful for...

Back 24

1) setting prices for products (product with close substitute, demand is therefore sensitive to price change)

2) complementary goods can command higher prices (printers cheap, cartridges expensive)

Front 25

Sensitivity of demand for a product to a change in real income

Back 25

Income elasticity of demand

Front 26

What is the formula for YED?

Back 26

% change in QD /

% change in real income

Front 27

1) + sign for YED

2) - sign for YED

Back 27

1) normal good

2) inferior good

Front 28

Do normal goods or inferior goods have more expensive substitutes?

Back 28

Inferior goods

Front 29

What does 1, 2 and 3 represent?

Back 29

1 - inferior good

2 - normal good

3 - superior good

Front 30

Price elasticity of supply

Back 30

Sensitivity of supply of a product to a change in its price

Front 31

PES > 1

Back 31

supply is price elastic

Front 32

PES < 1

Back 32

supply is price inelastic

Front 33

PES = 0

Back 33

supply is perfectly inelastic

Front 34

PES = infinity

Back 34

Supply is perfectly elastic

Front 35

If supply is elastic, producers can...

Back 35

increase output without a rise in cost or a time delay

Front 36

If supply is inelastic, firms will...

Back 36

find it hard to change production in a given time period.

Front 37

Sensitivity of demand for a product to a change in real income...

Back 37

Income elasticity of demand

Front 38

If S increases and D is perfectly inelastic...

Back 38

then price falls and quantity doesn't change.

Front 39

If D increases and S is perfectly elastic,

Back 39

then price stays the same and quantity rises.

Front 40

If S increases and D is perfectly elastic...

Back 40

then price stays the same and quantity rises.

Front 41

3 influencing factors of PED

Back 41

1) Time - longer the time period the more elastic supply is (difficult to change in short period of time)

2) stocks - if stocks available, supply relatively elastic ( respond quickly)

3) spare capacity - (under utilised machinery) supply likely to be elastic

Front 42

Difference between how much consumers are willing to pay and how much they actually pay for a product...

Back 42

Consumers' surplus

Front 43

2 factors affecting size of consumer surplus

Back 43

1) gradient of demand curve (steeper, greater CS)

2) changes in conditions of demand

Front 44

Producer surplus

Back 44

Difference between cost of supply and price received by producer for product

Front 45

1) above the supply curve...

2) below the supply curve...

Back 45

1) consumer

2) producer

Front 46

2 factors affecting size of producer surplus

Back 46

1) gradient of supply curve (steeper, greater surplus)

2) condition of supply increase supply increases surplus