IB Economics: Elasticities (PED, YED, and PES)

Comprehensive vocabulary flashcards covering key definitions, formulas, and concepts for Price Elasticity of Demand (PED), Income Elasticity of Demand (YED), and Price Elasticity of Supply (PES) based on the lecture material.

Price Elasticity of Demand (PED)

A measure of the responsiveness of the quantity demanded of a good to a change in its price, calculated as $\text{PED} = \frac{\%\Delta Q_d}{\%\Delta P}$. It is measured along a given demand curve and expressed as a positive absolute value.

Price Elastic Demand

A state where quantity demanded changes by a larger percentage than the change in price ($\text{PED} > 1$), representing a more than proportionate response by buyers.

Price Inelastic Demand

A state where quantity demanded changes by a smaller percentage than the change in price ($0 < \text{PED} < 1$), representing a less than proportionate response by buyers.

Unit Elastic Demand

A state where quantity demanded changes by the exact same percentage as the change in price ($\text{PED} = 1$). Graphically represented by a rectangular hyperbola where total revenue ($P \times Q$) remains constant at every point.

Perfectly Inelastic Demand

A state where quantity demanded does not change at all when price changes ($\text{PED} = 0$), represented graphically by a vertical demand curve.

Perfectly Elastic Demand

A theoretical benchmark where buyers take any quantity at a specific price, but quantity demanded falls immediately to zero if price rises ($\text{PED} = \infty$), represented by a horizontal demand curve.

Total Revenue (TR)

The total amount of money received by sellers from selling a good or service, calculated using the formula $\text{TR} = P \times Q$ (price multiplied by quantity sold).

SPLAT

A mnemonic for the five key determinants of PED: Substitutes (number and closeness), Proportion of income spent on the good, Luxury or necessity, Addictive or habit-forming nature, and Time period allowed to adjust.

Tax Incidence

The division of an indirect tax burden between consumers and producers; consumers pay most of the tax when demand is price inelastic ($\text{PED} < 1$), while producers pay most when demand is price elastic ($\text{PED} > 1$).

Income Elasticity of Demand (YED)

A measure of the responsiveness of demand for a good to a change in consumer income, calculated as $\text{YED} = \frac{\%\Delta Q_d}{\%\Delta Y}$. It involves shifts of the demand curve rather than movements along it.

Normal Good

A good whose demand moves in the same direction as consumer income, indicated by a positive income elasticity of demand ($\text{YED} > 0$). Demand shifts right when income rises and left when income falls.

Inferior Good

A good whose demand moves in the opposite direction to consumer income, indicated by a negative income elasticity of demand ($\text{YED} < 0$). Demand shifts left when income rises as consumers switch to superior alternatives.

Necessity (Income Inelastic Good)

A normal good with an income elasticity of demand between zero and one ($0 < \text{YED} < 1$), where demand rises more slowly than the percentage increase in income ($\%\Delta Q_d < \%\Delta Y$).

Luxury Good

A normal good or service with an income elasticity of demand greater than one ($\text{YED} > 1$), where demand rises at a faster percentage rate than income ($\%\Delta Q_d > \%\Delta Y$).

Engel Curve

A diagram with household income on the vertical axis and quantity consumed on the horizontal axis, illustrating how demand for a good transitions from a luxury ($\text{YED} > 1$) to a necessity ($0 < \text{YED} < 1$) and eventually bends backward as an inferior good ($\text{YED} < 0$).

Engel's Law

An economic observation stating that as household income rises, the proportion of income spent on food falls, even if absolute spending on food increases, because food has a low income elasticity of demand ($\text{YED} < 1$).

Sectoral Structure of an Economy

The relative division of total output between primary, secondary, and tertiary sectors; as real incomes rise over time, primary output falls as a share of GDP ($\text{YED} < 1$) while the services sector expands fastest due to having the highest $\text{YED}$.

Price Elasticity of Supply (PES)

A measure of how much the quantity supplied of a good responds to a change in its price, calculated along a given supply curve as $\text{PES} = \frac{\%\Delta Q_s}{\%\Delta P}$. It is always positive due to the law of supply.

Price Elastic Supply

A supply condition where quantity supplied changes by a larger percentage than the change in price ($\text{PES} > 1$), represented graphically by a straight supply line that intercepts the price axis.

Price Inelastic Supply

A supply condition where quantity supplied changes by a smaller percentage than the change in price ($0 < \text{PES} < 1$), represented graphically by a straight supply line that intercepts the quantity axis.

Unit Elastic Supply

A supply condition where quantity supplied changes by the exact same percentage as price ($\text{PES} = 1$), represented graphically by any straight-line supply curve starting from the origin ($0,0$), regardless of its slope.

Perfectly Inelastic Supply

A condition where quantity supplied does not change at all when price changes ($\text{PES} = 0$), represented graphically by a vertical supply curve.

Perfectly Elastic Supply

A theoretical condition where any price rise brings an unlimited increase in quantity supplied ($\text{PES} = \infty$), represented graphically by a horizontal supply curve.

Determinants of PES

The five factors determining the responsiveness of supply to price changes: Length of time to adjust, Mobility of factors of production, Spare (unused) capacity, Ability to store stocks, and the Rate at which costs increase.

Primary Commodities

Raw materials extracted directly from natural resources (such as agricultural produce, minerals, and crude oil) that typically feature low PED and low short-run PES, making their market prices highly volatile.

Manufactured Products

Finished goods made from raw materials using labour and capital (such as cars, phones, and processed foods) that generally exhibit higher PED and higher PES due to greater availability of substitutes and storage capability.