2.5-2.6: Elasticities of Demand and Supply
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131 Terms
What is price elasticity of demand?
Responsiveness of quantity demanded to a change in price.
What is the formula of PED?
%∆ QD / %∆ P
If 0 < PED < 1, demand is...
Price inelastic.
Demand is price inelastic when... (PED)
0 < PED < 1.
What does it mean when demand is price inelastic?
Qd is relatively unresponsive to price.
If 1 < PED < ∞, demand is...
Price elastic.
Demand is price elastic when... (PED)
1 < PED < ∞.
What does it mean if demand is price elastic?
Qd is relatively responsive to price changes.
If PED = 1, demand is...
Unit elastic.
Demand is unit elastic when... (PED)
PED = 1
What does it mean when demand is unit elastic?
%change in price = %change in Qd.
If PED = 0, demand is...
Perfectly inelastic.
Demand is perfectly inelastic when... (PED)
PED = 0.
What does it mean when demand is perfectly inelastic?
Qd is completely irresponsive to price changes.
If PED = ∞, demand is...
Perfectly elastic.
Demand is perfectly elastic when... (PED)
PED = ∞.
What does it mean when price is perfectly elastic?
Qd is completely responsive to price changes.
What curve does perfectly inelastic demand have?
Vertical.
What curve does perfectly elastic demand have?
Horizontal.
When must firms consider elasticity?
When changing prices.
What will happen to demand and total revenue if the price of an elastic good increases?
Less demand; increased total revenue.
What will happen to demand and total revenue if the price of an inelastic good increases?
Demand is maintained; increases total revenue.
What will happen to demand and total revenue if the price of an elastic good decreases?
Demand increases, increases total revenue.
What will happen to demand and total revenue if the price of an inelastic good decreases?
Demand is maintained; price decreases.
When must governments consider elasticity?
When placing taxes on goods.
Governments usually place taxes on goods with what elasticity?
Inelastic goods.
Why do governments place taxes on inelastic goods?
Maximise tax revenues.
What will happen to demand and tax revenue if a tax is placed on an elastic good?
Demand decreases; less tax revenues.
What will happen to demand and tax revenue if a tax is placed on an inelastic good?
Demand stays the same; increased tax revenues.
How price elastic are primary commodities?
Price inelastic.
Why are primary commodities price inelastic? (2)
Necessary and no substitutes.
How price elastic are manufactured products usually?
Price elastic?
Why are manufactured products usually price elastic?
May not be necessary and may have substitutes.
What is an example of a manufactured product which is price inelastic?
Medicines.
What are the determinants of PED? (4)
- Number and closeness of substitutes.
- Necessities vs luxuries.
- Length of time.
- Proportion of income spent on certain goods.
If there are more substitutes, price elasticity of demand is...
More elastic.
If there are less substitutes, price elasticity of demand is...
Inelastic.
Why do goods with more substitutes have a higher price elasticity?
Consumer can buy another substitute that satisfies needs.
Why do goods with les substitutes have a lower price elasticity?
Consumers cannot buy another substitute to satisfy needs.
What is the price elasticity of a necessity?
Price inelastic.
What is the price elasticity of a luxury?
Price elastic.
Why do necessities have less elastic demand?
Consumers must still purchase necessities.
Why do luxuries have more elastic demand?
Consumers do not require these goods.
If there is more time to make a decision, price elasticity is...
Price elastic.
If there is less time to make a decision, price elasticity is...
Price inelastic.
If a higher proportion of income is spent on a good, demand is...
Price elastic.
If a lower proportion of income is spent on a good, demand is...
Price inelastic.
What is income elasticity of demand (YED)?
Responsiveness of quantity demanded to a change in income.
What is the formula for YED?
%∆ Qd / %∆ Income
If YED > 0, the good is a...
Normal good
What happens to a normal good when income changes?
Income and demand change in the same direction.
A good is a normal good if... (YED)
YED > 0
If income increases, the demand of a normal good...
Increases.
If income decreases, the demand of a normal good...
Decreases.
If YED < 0, the good is a...
Inferior good.
What happens to an inferior good when income changes?
Income and demand changes in opposite directions.
A good is an inferior good if... (YED)
YED < 0.
If income increases, the demand of an inferior good...
Decreases.
If income decreases, the demand of an inferior good...
Increases.
If 0 < YED < 1, the good is a...
Necessity,
If 0 < YED < 1, demand is...
Income inelastic.
If income changes, what happens to the demand for necessities?
Demand is not responsive to income changes.
A good is a necessity if... (YED)
0 < YED < 1.
If YED > 1, the good is a...
Luxury.
If YED > 1, demand is...
Income elastic.
If income changes, what happens to the demand for luxuries?
A change in income has a significant impact on demand.
A good is a luxury if... (YED)
YED > 1
The Engel curve shows how a good can be... (3)
- A luxury good when income is low.
- A necessity when income increases.
- An inferior good when income is high.
What happens to incomes during economic growth?
Incomes increase.
What do increasing incomes mean for the demand of goods/services?
Demand increases.
During economic growth, the market for income elastic goods...
Expands at a greater rate.
During economic growth, the market for income inelastic goods...
Expands at a lower rate.
During recessions, the market for income elastic goods...
Has a greater chance of declining.
During recessions, the market for income inelastic goods...
Has a lower chance of declining.
During recession, the market for inferior goods...
Is likely to increase.
How many sectors in each economy?
Three.
What are the three sectors of an economy?
- Primary (agriculture).
- Secondary (manufacturing).
- Tertiary (services).
What products does the primary sector produce? (2)
Agriculture and food.
What products does the secondary sector produce?
Manufactured goods.
What products does the tertiary sector produce?
Services.
With economic growth, which sector shrinks?
Primary/agricultural sector.
With economic growth, which sector expands?
Secondary and tertiary.
What is the income elasticity of the demand for products produced in the primary sector?
Income inelastic.
What is the YED of products produced in the primary sector?
0 < YED < 1
What is the YED of products produced in the secondary sector?
YED > 1
What is the income elasticity of the demand for products produced in the secondary sector?
Income elastic.
What is the YED of products produced in the tertiary sector?
YED >> 1; very high.
What is the income elasticity of the demand for products produced in the tertiary sector?
Very income elastic.
What is price elasticity of supply?
Responsiveness of quantity supplied to a change in price.
Which price elasticity is always in positive values?
Price elasticity of supply.
If 0 < PES < ∞, supply is...
Price inelastic.
Supply is price inelastic if... (PES)
0 < PES < 1.
What does it mean if supply is price inelastic?
Quantity supplied is not very responsive to a change in price.
If PES > 1, supply is...
Price elastic.
Supply is price elastic if... (PES)
PES > 1
What does it mean if supply is price elastic?
Quantity supplied is relatively responsive to changes in price.
If PES = 1, supply is...
Unit elastic.
Supply is unit elastic if... (PES).
PES = 1
What does it mean if supply is unit elastic?
%change in price = %change in quantity supplied.
If PES = 0, supply is...
Perfectly inelastic.