1.2.3 + 1.2.5 Elasticities of Demand and Supply
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26 Terms
Price Elasticity of Demand
Measures the responsiveness of the quantity demanded is to a change in price
PED Calculation
percentage change in quantity demanded/percentage change in price
PED Determinants
The availability of substitutes/time/addictive/habit-forming/the degree of necessity/breadth of market
Income Elasticity of Demand
Measures the responsiveness of the quantity demanded given a change in income
YED Calculation
percentage change in quantity demanded/percentage change in price
Normal Goods
Goods that have a positive YED
Inferior Goods
Goods that have a negative YED
Luxury Goods
Goods that have a very high YED (YED>1)
Cross Elasticity of Demand
Looks at how the quantity demanded of one good is affected by a change in price of another
XED Formula
% Change in quantity demanded of good A/ % change in quantity demanded of good B
Unrelated goods have an XED of
0 (perfectly inelastic)
Strong substitutes XED
Elastic (XED>1)
Weak substitutes XED
Inelastic (0<XED<1)
Strong compliments XED
Elastic (XED<-1)
Weak compliments XED
Inelastic (-1<XED<0)
Substitute Goods
Goods that have a positive XED (have competitive demand)
Complementary Goods
Goods that have a negative XED (have a joint demand)
Elastic Demand
When consumers are sensitive to change in price or income there is a more proportionate response
Inelastic Demand
When consumers are unresponsive to a change in price or income there is a less proportionate response
Price Elasticity of Supply
A measure of the responsiveness of quantity supplied given a change in price (cannot be negative)
PES Formula
% change in quantity supplied/ % change in price
Short run
Period when at least one factor of production is fixed
Long run
When all factors of production involved in making a good are variable
Why PES may be elastic
Many substitutes/Longer time period/Spare capacity and Lots of Stocks
Why PES may be inelastic
No substitutes/short time period/no spare capacity and a lack of stocks
Determinants of PES
Spare capacity/stockpiling/time and mobility of factor inputs