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37 Cards in this Set
- Front
- Back
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What is Elasticity?
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A measure of the responsiveness of quantity to a change in price.
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What is price elasticity of demand?
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A measure of the responsiveness of quantity demanded to a change in the price of the goods or service.
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What is the formula of the price elasticity of demand?
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Midpoint Formula:
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If Ed > 1, demand is...
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Price elastic and buyers are sensitive to a price change. The law of demand is relatively strong.
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If Ed < 1, demand is...
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Price inelastic and buyers are not sensitive to a price change. The law of demand is relatively weak.
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If Ed = 1, demand is...
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Unitary elastic. Price and Quantity change in exactly the same proportion.
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If Ed = 0, demand is...
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Perfectly inelastic. A change in price will have no effect on demand.
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If Ed = ∞, demand is...
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Perfectly elastic. The quantity demanded becomes zero if the price rises by the smallest amount and the quantity demanded becomes infinite if the price falls by the smallest amount.
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What is total revenue?
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Total revenue or total expenditure is simply the price of a good multiplied by quantity.
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When demand is elastic, price and total revenue move in...
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opposite directions. e.g. a rise in price decreases total revenue, while a fall in price increases total revenue.
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When demand is inelastic, price and total revenue move in...
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the same direction. e.g. a rise in price increases total revenue, while a fall in price decreases total revenue.
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When demand is unitary elastic...
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a change in price does not change total revenue.
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What is price discrimination?
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A pricing strategy that charges customers different prices for the same product or service. In pure price discrimination, the seller will charge each customer the maximum price that he or she is willing to pay.
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What are the factors affecting price elasticity of demand?
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Can be remembered as SPLAT:
Substitutes Proportion of income spent Luxury or necessity Addiction Time |
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How do substitutes affect PEd?
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The greater number of close substitutes a good has, the more price elastic its demand. Likewise, if the good has little or no substitutes, the more price inelastic its demand.
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How does proportion of income spent affect PEd?
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Expensive goods are likely to be relatively price elastic because they take up larger proportions of the consumer's income or budget. Likewise, inexpensive goods are likely to be relatively price inelastic because they take up a smaller proportion of the consumer's income or budget.
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How do luxuries and necessities affect PEd?
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If a good is a necessity (such as food), they will be more price inelastic. Likewise, if a good is a luxury (such as jewellery), they will be more price elastic.
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How does time affect PEd?
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If consumers have time to respond to a price change, then demand will be more price elastic. Likewise, if consumers have little time to respond to price change, then demand will be more price inelastic.
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How does addiction affects PEd?
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If a good is addictive (such as marijuana), the demand will be more price inelastic. Likewise, if a good is not addictive, the demand will be more price inelastic.
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What is price elasticity of supply?
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Price elasticity supply measures the responsiveness of a quantity supplied to a change in price.
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What is the formula for price elasticity of supply?
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Midpoint Formula:
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What are the factors affecting price elasticity of supply?
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Can be remembered as BRITS:
Barriers to entry Raw materials Inventory Time Spare Production Capacity |
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How does barriers to entry (factor substitution) affect PEs?
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if both capital and labour resources are occupationally mobile then the elasticity of supply for a product is high because capital and labour can be swapped with little loss of efficiency or productivity.
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How do raw materials affect PEs?
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If raw materials are readily available, it will be relatively easy to expand production.
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How do raw inventory affect PEs?
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Businesses with plenty of stock can increase supply easily.
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How does time affect PEs?
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PEs is higher the longer the time period that a firm is allowed to adjust its production levels. e.g. Farmers need lots of time to switch from growing wheat to barley.
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How does spare production capacity affect PEs?
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If businesses are not running to full capacity they are more able to increase supply. e.g. In a recession, supply is fairly elastic due to spare labour and capital resources.
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What is income elasticity of demand?
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Measures the responsiveness of demand to a change in consumer income. Helps determine whether a good is normal, inferior or a luxury.
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What is the formula for income elasticity of demand?
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Can be measured as percentage change in quantity demanded of good X divided by the percentage change in real consumers' income.
*Remember: The sign (+ or -) is important in this formula. |
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If Ey is between 0 and 1, the good is...
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a necessity (normal good). e.g. food and water
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If Ey is < 1, the good is...
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a luxury or superior good (normal good). e.g. Jewellery and designer clothing
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If Ey is < 0, the good is...
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An inferior good. e.g. home brand products and second hand goods.
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What is cross elasticity of demand?
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Measures the responsiveness of the demand for one good (a) to a change in the price of a related good (b). Helps determine whether the good is a substitute or a complement
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What is the formula for cross elasticity of demand?
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Measured as the % change in quantity demand for good (a) divided by the % change in price for good (b). Often noted as XEd, CPED, and Eab.
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if XEd > 0, the two goods are...
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substitutes. e.g. margarine and butter.
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if XEd < 0, the two goods are...
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a complements. e.g. cars and fuel.
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if XEd = 0, the two goods are...
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independent (no relationship between the two goods)
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