IB Economics Chapter 3 - Elasticities
Terms in this set (20)
Price elasticity of demand (PED)
a measure of the responsiveness of the quantity of a good demanded due to changes in price.
Price inelastic demand
quantity demanded is relatively NOT responsive to change in price. 0<PED<1
Price elastic demand
quantity demanded IS relatively responsive to change in price. PED>1
percent change in quantity demanded is equal to percent change in price. PED=1
Perfectly inelastic demand
quantity demanded DOESN'T respond at all to price PED=0
Perfectly elastic demand
quantity demanded responds EXTREMELY to price PED=Infinite
amount of money received by firms when they sell a good/service. price x quantity sold
goods arising directly from the use of natural resources (any product that is produced in the primary sector)
Cross-price elasticity of demand (XED)
a measure of responsiveness of demand for one good due to change in price of another good.
XED>0 - Substitutes (QD of one good rises when the price of another rises)
XED<0 - Complements (QD of a good falls when the price of another rises)
XED=0 - Unrelated
Income elasticity of demand (YED)
a measure of the responsiveness of demand due to changes in income.
YED>0 - Normal Good
YED<0 - Inferior Good
YED>1 - Income Elastic
YED<1 - Income Inelastic
Price elasticity of supply (PES)
a measure of the responsiveness of the quantity of a good supplied due to change in its price.
Determinants of price elasticity of demand
SPLAT (Substitutes, Proportion of income, Luxury vs necessity, Addiction, Time).
Determinants of price elasticity of supply
MUST (Mobility of resources, Unused capacity, Stored stocks, Time).
When YED>0. Quantity demanded rises when income rises.
When YED<0. Quantity demanded falls when income rises.
When XED>0. Quantity demanded of one good rises when the price of another rises.
When XED<0. Quantity demanded of one good decreases when the price of its complement rises.
measure of the responsiveness/sensitivity of a variable to changes in price or any of the variable's determinants
PED<1 Item that is necessary
PED>1 Items that are unnecessary