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Price elasticity of demand (PED)
The responsiveness of consumers to a chance in price.
If a consumer buying behavior changes drastically with a small chance in price, the product has an elastic demand.
If consumer buyer behavior changes minimally with a large change in price, the product has an inelastic demand.
Determinants of elasticity of demand
Substitability
Amount of income spent
Luxury vs necessity
Time
Income elasticity of demand (YED)
The responsiveness of consumers to a change in their income.
If the buyer’s income increases, causing the sales of a product to increase, we have a positive income elasticity. This occurs when the product is considered to be a normal good.
If a buyer’s income increases, causing the sales of a product to decrease, we have a negative income elasticity. This occurs when the product is considered to be an inferior good.
Price elasticity of supply (PES)
The responsiveness of sellers to a change in price.
If sellers producing behavior changes drastically with a small change in price, the product has an elastic supply.
If sellers producing behavior changes minimally with a large change in price, the product has an inelastic supply.
Determinants of price elasticity of supply
Time
Availability of inputs
Consumer surplus
The benefit surplus received by the buyer.
Price buyer is willing to pay minus the price actually paid.
Producer surplus
The benefit surplus received by the seller.
Actual selling price minus the minimum amount the seller is willing to sell at.
Regressive tax
Tax rises less than in proportion to one’s income. (e.g. sales tax)
Proportional tax
Tax rises in proportion to one’s income. (e.g. flat tax)
Progressive tax
Tax rises more than in proportion to one’s income. (e.g. income tax)
Specific taxes
Based on a particular quantity of a product sold, not based on the products’ prices.
Ad Valorem taxes
Based on the market value (price) of the products sold. Tends to be more popular with the U.S. government.
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