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Elasticity

Terms in this set (33)

Price elasticity of demand
The responsiveness of quantity demanded to a change in price.
Price elasticity of demand equation
Elastic
PED > 1 (greater)
Price Elastic diagram
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Elastic diagram
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Inelastic
PED < 1 (less)
Price inelastic
Perfectly Price Inelastic
Unit elastic
PED=1
Necessites and Luxuries
Luxuries will have higher PED than necessities, as necessities need to be purchased of the price rises.
Existence of close substitutes
Items with many close substitutes will tend to have a higher PED
Proportion of income spent on the good
Items that represent a large proportion of the consumers income will have a higher PED
Time
When consumers have a greater period of time to make a decision, their PED will be higher for the item.
Price Elasticity of demand and total revenue
Money receives by the firm in exchange for selling goods and services.
Total revenue equation
TR = price x quantity
Total revenue elastic
Price is elastic if total revenue mores in opposite direction to a change in price.
Total revenue inelastic
Demand is inelastic if total revenue moves in the same direction as a price movement.
Total revenue unit elastic
Demand is unit elastic if total revenue remains constant after a price movement.
Price elasticity of demand and taxes
Government imposing a sales tax, we assume it as a decrease in supply which results in a lower quantity being traded as a higher price.
Demand is price elastic
e.g. tim tams
Demand is price inelastic
e.g. alcohol
Tax will fall moe of the consumer when demand is price inelastic
Tax revenue will be greater on goods with price inelastic demand
Price elasticity of supply
The responsiveness of quantity supplied to a change in price.
Price elasticity or supply equation
Time required to produce or supply the good/ service
The longer it takes to produce an item, the lower its PES will be
Nature of the industry
Firms have to fully produce the product and not just use parts of it.
Income elasticity of demand
The responsiveness of quantity demanded to a change in income.
Income elasticity of demand equation
Normal goods (positive)
When income rises, the demand for normal goods increases.
Inferior goods (negative)
When income rises, the demand for inferior goods decreases.
Cross price elasticity of demand
The responsiveness of demand for one good (A) to a change in the price of another good (B).
Cross price elasticity of demand equation
Substitutes (positive)
If the price of one brand rises, then demand for its substitute will increases.
Complements (negative)
If the price of ice-cream rises, then the demand for Ice-Magic will decrease.
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