4. A Closer Look at Demand: Elasticity of Demand

PED is a measure of ___

how much the quantity demanded changes of a product changes when there is a change in price

PED = (equation)

ΔQd% / ΔP% = (ΔQd / ΔP) × (P initial / Qd initial) = slope × (P initial / Qd initial)

PED will always result in a ___ value because of its inverse relationship.

negative

PED = 0

perfectly inelastic (vertical line)

0

inelastic demand, low responsiveness (steep line)

PED = 1

unit elastic demand (weird curve)

1

elastic demand (high responsiveness) (not steep line)

PED = ∞

perfectly elastic (horizontal line)

determinants of PED

1. number and closeness of substitutes
2. necessity
3. proportion of income
4. time period

Explain number and closeness of substitutes in the determinants of PED

to more substitutes, and the closer they are, the more elastic the demand will be. VV

Explain necessity in the determinants of PED

the more necessary a product is, the more inelastic it will be

Explain proportion of income in the determinants of PED

the smaller the portion of income spent, the more inelastic

Explain time period in the determinants of PED

takes time for consumers to change buying habits, thus more inelastic in the short term

why do firms need to understand PED

predictions, effect on their pricing decisions, effect on the total revenue

why does the gov. need to understand PED

aware of consequence when imposing taxes

PED for primary commodities

primary commodities are raw materials, few substitutes. the consumers (firms) have n o choice but to purchase them to keep up with sales. thus demand is inelastic

PED for manufactured goods

manufactured goods are goods sold to the public. more options available thus demand is elastic

YED is a measure of ___

how much the demand for a product changes when their is a change in the consumers income.

YED = (equation)

ΔQ% / ΔY% = (ΔQ / ΔY) × (Y initial / Q initial) = slope × (Y initial / Q initial)

If YED is - then it is a(n) ___ good.

inferior

If YED is + then it is a(n) ___ good

normal

0

necessity (income inelastic)

YED>1

luxury (income elastic)

engel curve

shows the relationship between income and the demand for a product over time.

importance of YED for firms

decision making, knowing the best suitable price for your audience.

importance of YED for explaining the structure of an economy

as income changes, the output of some sectors (primary, secondary or tertiary) differ.