1.2 second half - more elasticity

what is income elasticity of demand?

- measures the relationship between a change in quantity demanded for good X and a change in a consumer's income

what is the equation for income elasticity of demand?

YED = % change in demand/% change in income

what elasticity do normal goods have?

- positive income elasticity

what is positive income elasticity?

- as income increases, demand for a product or service also increases

- hence the coefficient is positive

what is the YED of a luxury good?

- YED> 1

- therefore it is elastic

why is the YED of a luxury good bigger than 1?

- because luxury products see a greater volatility (sensitivity) over a business cycle whereas for necessities demand is less sensitive to changes in the cycle

what is the YED of necessities? and why?

- 0-1

- inelastic

- because necessities dont see a great volatility

what is the YED of inferior goods?

- negative

- YED < 0

what is the importance of YED?

- helps firms to predict the effects of changes in the economic cycle of their sales

difference between demand for luxury and necessary products?

- luxury products with a high income elasticity see greater sales volatility over a business cycle than necessities where demand is less sensitive to changes in the economic cycle

what is cross price elasticity of demand?

- measures responsiveness of the quantity demanded of one good to a change in the price of another good

what is cross price elasticity particularly useful for?

- useful in analysing the relationship between substitute and complementary goods

what is the formula for calculating cross price elasticity of demand between 2 goods, A and B?

% change in quantity of A/ % change in price of B

draw a diagram explaining how the price and demand works

if the cross price elasticity demand of the 2 goods are negative...

- the 2 goods are complements

- an increase in the price of good B results in a decrease in the quantity demanded of good A

what does it mean if XED is 0?

- no relationship between the products

what does XED tell firms?

- tells them how to price their products

if XED is 0-> -1

- the XED is weakly complementary

- inelastic XED

-1 or lower indicates the XED is...

- elastic XED

- therefore the complements are strongly complementary

- strong relationship

if XED Is positive what does this indicate?

- good is a substitute

- this is because an increase in the price of one product will lead to a rise in demand for its substitute

if the XED is 0-1

- inelastic XED

- weak substitutes

if the XED is 1+..

elastic XED

- the two goods are strong substitutes

What is the definition of supply?

The quantity that producers are willing and able to sell at any given price in a given period of time.

What is the relationship between price and quantity supplied?

It is positive; as price rises, the quantity supplied increases.

Why does the quantity supplied increase as price rises?

Higher prices create a profit incentive for producers to expand supply.

What causes a movement along the supply curve?

A change in price.

What factors can cause a shift in the supply curve?

- Cost of production,

- technological advancements,

- productivity,

- taxes/subsidies,

- barriers to entry/exit,

- future price expectations.

How do taxes affect supply?

Taxes increase the cost of production, leading to a decrease in supply at a given price.

What role does technology play in supply?

Technological advancements increase efficiency, leading to higher output and a rightward shift in the supply curve.

What is meant by 'barriers to entry and exit' in supply?

These are obstacles that make it difficult for new firms to enter or exit a market, affecting overall supply.

What causes shifts in the conditions of supply?

Changes in factors such as production costs, technology, and market expectations.

what is PES?

measures responsiveness of quantity supplied to a change in price

formula for PES

% change in quantity supplied / % change in price

perfectly inelastic supply

when the price elasticity of supply is zero, so that changes in the price of the good have no effect on the quantity supplied. A perfectly inelastic supply curve is a vertical line.

- 0

relatively inelastic supply

0 < Es < 1

relatively elastic supply

- 1 -> infinity

perfectly elastic supply

- infinity

what influences make PES elastic?

- supplier has plenty of spare capacity to increase output

- high stock levels are immediately available to meet rising demand

- short production time frame to get extra products to marker

- ease of factor substitution is high - resources re allocated easily and easy to produce in long run

what influences make PES inelastic?

- limited spare capacity short term

- stock levels are low and can only be increased with a time lag

- time delay between start and finishing the production process

- factors of production are immobile and cannot easily be switched between task e.g. complex, scarce raw materials, production process is lengthy