detailed graph background knowledge

Price elasticity of demand definition

the responsiveness of a change in demand to a change in price

PED equation

% change in QD/ % chnage in P

what is an elastic good

a good that is very resonsive to a change in price

numerical value for PED of an elastic good

>1 (shallow negativegradient)

what is an inelastic good

demand is relatively unresponsive to change in price

numerical value for PED of an inelastic good

<1  (steep negative gradient)

what is a unititary elastic good

has a change in demand which is equal to the change in price

numerical value for PED of a unitary elastic good

=1 (1/x looking graph)

what is a perfectly elastic good

has a demand which does not change when price changes

numerical value for PED of an perfectly inelastic good

=0 vertical line

perfectly elastic good

demand falls to 0 when price changes

numerical value for PED of a perfect;y elastic good

= infinity, horizontal line

factors influencing PED

necessity, substitutes, addictiveness, proportion of income spent, durability, peak and off peak demand

tax with inelastic demand

burden on customers beacuse price increase demand does not change significantly

tax on inelastic demand graph

tax on an elastic good

burden on firm beacuse price increase= large decrease in demand

subsidy definition

a payment from the governemnet to firms to encourage the production of a good and to lower their average cost

graph of subsidy

income elasticity of demand

the responsivemenss of a change in demand to a chnage in come

income elasticity of demand formula

YED= %change QD/ % change in Y (income)

inferior good

demand falls as income increases YED<0

normal goods

demand increases as income increases YED>0

luxury good

increase in income cause even bigger increase in demand YED>1 eg holiday