ib economics SL - elasticities 2.4-6

glossary guide but flashcards

Elasticity

A measure of the responsiveness of an economic variable (such as the quantity demanded of a product) to a change in another economic variable (such as its price or income).

Price elasticity of demand (PED)

A measure of the responsiveness of the quantity demanded of a good or service to a change in its price.

(Price) elastic demand

Where a change in the price of a good or service leads to a proportionately larger change in the quantity demanded of the good or service in the opposite direction (PED > 1).

(Price) inelastic demand

Where a change in the price of a good or service leads to a proportionately smaller change in the quantity demanded of the good or service in the opposite direction (PED < 1).

Perfectly inelastic demand

Where a change in the price of a good or service leads to no change in the quantity demanded of the good or service (PED = 0).

Perfectly elastic demand

Occurs with a horizontal demand curve signifying that any amount can be bought at a particular price (PED = ∞).

Unitary elastic demand

Occurs when a change in the price of a good or service leads to an equal and opposite proportional change in the quantity demanded of the good or service (PED = 1).

Price elasticity of supply (PES)

A measure of the responsiveness of the quantity supplied of a good or service to a change in its price.

(Price) elastic supply

Where a change in the price of a good or service leads to a proportionately larger change in the quantity supplied of the good or service in the same direction (PES > 1).

(Price) inelastic supply

Where a change in the price of a good or service leads to a proportionately smaller change in the quantity supplied of the good or service in the same direction (PES < 1).

Perfectly inelastic supply

Where a change in the price of a good or service leads to no change in the quantity supplied of the good or service (PES = 0).

Perfectly elastic supply

Occurs with a horizontal supply curve signifying that any amount can be offered at a particular price (PES = ∞).

Unitary elastic supply

Occurs when a change in the price of a good or service leads to an equal proportional change in the quantity supplied of the good or service (PES = 1).

Income elasticity of demand (YED)

The responsiveness of demand for a good or service to a change in income.

Normal goods

A good where the demand for it increases as income increases.

Inferior goods

Lower quality goods for which higher quality substitutes exist; if incomes rise, demand for the lower quality goods decreases.

Luxury goods

Goods that are not considered essential by consumers and therefore have price elastic demand (PED > 1) or income elastic demand (YED > 1).

Necessities

Goods that are essential or necessary; their income elasticity of demand is positive but less than one.

Cross price elasticity of demand (XED)

A measure of the responsiveness of the demand for one good to a change in the price of another good.

Substitutes

Goods that can be used in place of each other, as they satisfy a similar need.

Complements

Goods that are jointly consumed, for example, coffee and sugar.

Unrelated goods

Goods for which the change in the price of one has no effect on the demand for the other.

Determinants of PED

Factors influencing PED include the number and closeness of substitutes, the necessity of the good, the proportion of income spent on the good, and the time period considered.

Determinants of PES

Factors influencing PES include the length of time, mobility of factors of production, unused capacity, and ability to store stocks.