carina elasticities

Elasticities definition

measures the responsiveness of a variable to changes in price of any of the variables determinants

what are the 3 types of elasticities?

price elasticity of demand (PED)

income elasticity of demand (YED)

price elasticity of supply (PES)

Elasticities definition

measures the responsiveness of a variable to changes in price of any of the variables determinants

what are the 3 types of elasticities?

price elasticity of demand (PED)

income elasticity of demand (YED)

price elasticity of supply (PES)

Price Elasticity of Demand definition

measures the responsiveness of consumers of a good/service to a change in price of that good/service

formula for calculating PED

Qnew - Qold/Qold ÷ Pnew - Pold/Pold

why is PED always going to be negative?

because the relationship between price and quantity demand is negative

demand when PED = 0 < PED < 1

Inelastic demand, meaning Qd is relatively unresponsive to changes in price

demand when PED = 1 < PED < infinity

elastic demand, meaning Qd is relatively responsive to changes in price

demand when PED = 1

Unit elastic demand, meaning Qd is proportionally responsive to a change in price

what is total revenue when PED=1?

TR is maximized and if there is a change in price after it would only decrease

Demand when PED = 0

Perfectly inelastic demand, meaning Qd is not at all responsive to a change in price

demand when PED = infinity

perfectly elastic demand, meaning Qd is infinitely responsive to a change in price

the steeper the gradient the more____

___ inelastic demand is

if prices decreases and demand is inelastic how does it affect TR

decrease in price and an increase in quantity demand = decrease in TR

if prices decrease and demand elastic how does it affect TR

decrease in price and an increase in quantity demand = increase in TR

if prices increases and demand is inelastic how does it affect TR

increase in price, decrease in quantity demand = increase in TR

if prices increases and demand is elastic how does it affect TR

increase in price, decrease in quantity demand = decrease in TR

what is the acronym for the determinants of PED?

SPLAT

what are the determinants of PED? (5)

1 - substitutes

2 - proportion of income

3 - luxury or necessity

4 - addictiveness

5 - Time

if a good has more substitutes it has _____ demand

if a good has less substitutes is has _____ demand

elastic, inelastic

if the good takes up a large proportion of income it has ___ demand

if the good takes up a small proportion of income it has ___ demand

elastic, inelastic

if the good is a luxury good it has ____ demand

if the good is a necessity good it has ____ demand

elastic, inelastic

if you can get addicted to the good it has ___ demand

if not it has ___ demand

inelastic, elastic

the longer the time between a change in price of a good the more ___ demand is. thus the shorter the time the more ____ demand is

elastic, inelastic

how is the knowledge of PED important for firms?

it can help them predict the effects of changes in price on their quantity demand and TR

how is the knowledge of PED important for the government?

it can help them predict the effects of putting indirect taxes on goods/services. E.G - if a good/service has more inelastic demand it will increase revenue rather than if the good had more elastic demand

demerit good definition

good that harms society

excise taxes

taxes placed on a certain good

Primary commodity definition

raw materials that go into the making of other goods

what is the elasticity of primary comodities?

tends to be inelastic as there are few substitues

manufactured goods definition

a good that is produced mainly by the application of labour and capital to raw materials

what is the elasticity of manufactured goods?

tend to be more elastic as there are more alternatives, brands and substitutes

Income Elasticity of Demand (YED) definition

measures the responsiveness of demand to changes in income and involves demand curve shifts.

formula for calculating YED

Qnew - Qold/Qold ÷ Ynew - Yold/Yold

what does a positive YED value indicate?

that it is a normal good, when income increases so does quantity demand

what does a negative YED value indicate?

that it is an inferior good, when incomes increases demand decreases

when YED is absolutely above 1 income is ____

elastic

when YED is absolutely below 1 income is ____

inelastic

if YED is + and above 1

luxury good

if YED is - and below 1

necessity good

Engle Curve

demonstrates the relationship between income and quantity demand of a good

what are the 3 sectors of economy

primary, secondary, tertiary

what does the primary sector include?

agriculture, mining, forestry - raw materials

what does the secondary sector include?

cars, housing, infrastructure, manufacturing

what does the tertiary sector include?

entertainment, travel, banking, health - services

Price Elasticity of Supply (PES) definition

measures the responsiveness of the quantity of a good supplied to changes in its price

formula for calculating PES

Qnew-Qold/Qold ÷ Pnew - Pold/Pold

supply is what when PES - 0 < PES <1

Inelastic supply, meaning Qs is relatively unresponsive to a change in price.

supply is what when 1 < PES < ∞

elastic supply, meaning Qs is relatively responsive to a change in price

supply is what when PES = 1

unit elastic supply, meaning Qs is proportionally responsive to a change in price.

supply is what when PES = 0

perfectly inelastic supply, meaning Qs is not responsive to a change in price.

supply is what when PES = ∞

perfectly elastic supply, Qs is infinitely responsive to a change in price.

What are the determinants of PES? (5)

1 - Time

2 - Mobility of resources

3 - ability to stores stocks

4 - unused capacity

5 - Rate of cost of production

Time as a determinant of PES

The more time that firms have to respond to changes in price the greater ability they have to increase or decrease their quantity supply.

Mobility of resources as a determinant of PES

The easier that firms can switch resources from one type of production to another (where price is increasing) the more responsive they can be to changes in price.

Ability to store stocks as a determinant of PES

The longer that firms can store stocks of their goods the easier it is for them to increase their quantities in the short term.

Unused capacity as a determinant of PES

If firms have more unused capacity in their factories then it is easier and cheaper to increase their quantity supply. If there is less spare capacity it will be more expensive and take longer to increase their quantity supply.

Rate of cost of production as a determinant of PES

supply will be inelastic if costs of producing extra output increases rapidly, because firms will struggle expanding their output as they are unlikely to incur large costs. but if costs of production of extra output rises slowly they are more able to expand their output making supply elastic