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Description
Flashcards by Jasmine Wells, updated more than 1 year ago
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Created by Jasmine Wells
over 8 years ago
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| Question | Answer |
| What is elasticity? | The measure of the responsiveness of a variable to changes in price or any of the variable's determinants. |
| What is price elasticity of demand (PED)? | The measure of responsiveness of the quantity of a good demanded to changes in its price, along a given demand curve. |
| What happens to a good if it is price elastic? | There is a large responsiveness to quantity demanded relative to change in price. E.g. A particular chocolate brand |
| What happens to a good if it is price inelastic? | There is a small responsiveness in quantity demanded relative to change in price. E.g. Cigarettes |
| Why is the sign of PED usually negative? | Since the price and quantity demanded are usually inversely proportional. |
| What is the range of values for a price inelastic demanded good? And describe. | Demand is price inelastic when PED is greater than 0 but is less than 1. Percentage change in quantity demanded is less than percentage change in price. Because of this PED is always less than one. |
| What is the range of values for a price elastic demanded good? And describe. | Demand is price elastic when PED>1 but less than infinity. The percentage change in quantity demanded is greater than the percentage change in price. Because of this, the value of PED will always be greater than 1. |
| What are the 3 special cases of PED and demand curves? | - Unit elastic demand (PED =1) - Percentage change in quantity demanded = percentage change in price - Perfectly inelastic demand (PED=0) - The percentage change in quantity demanded is always constant at any price - Perfectly inelastic demand (PED= infinity)- When a change in price results a large response in quantity demanded, demand is perfectly inelastic. |
| PED varies along a curve. Where along the curve is a good price elastic? | At high prices, and low quantities. This is due to the relatively large percentage change in quantity demanded. |
| Where along the curve is the price inelastic? | Occurs at low prices and high quantities. This is due to the low percentage change in quantity demanded over high percentage change in price. |
| Where along the demand curve is there unit elastic demand? | At midpoint. |
| What are the 4 determinants of price elasticity of demand? | - Number and closeness of substitutes - Necessities Vs. Luxuries - Time period - Proportion of income spent on a good. |
| Describe the number and closeness of substitutes and its relationship to PED | - The more substitutes a good or service has, the more elastic the demand. - Consumers can switch to other goods if price as slightly increased causing a substantial response in quantity demanded. -Products with not many substitutes has an inelastic demand curve. |
| ylDescribe the concept of necessities vs luxuries and their relationship to PED | Demand for necessities are generally less elastic than demand for luxuries. |
| Describe time period and its relationship with PED | The longer the time period a consumer makes a purchasing decision, the more elastic the demand. Over time consumers can reconsider if they really want the good/look into alternatives. |
| Describe proportion of income spent on a good and its relationship to PED | The larger the portion of income needed to purchase the good, the more elastic the demand. E.g. The same percentage increase in summer holidays and a pen (e.g. 10%) will generate a larger response in qd for summer holidays. |
| What is total revenue? | Amount of money received by firms when they sell a good or service and is equal to the price of good x qty sold |
| Describe the effects on revenue when the demand is elastic.(PED>1) | -An increase in price causes a fall in total revenues. -Decrease in price causes a an increase in total revenues. |
| Describe the effects of revenue when the demand is inelastic (0<PED<1) | - An increase in price causes an increase in total revenues - A decrease in price causes a fall in total revenues. |
| Describe the effects of revenue when the demand is unit elastic (PED=1) | - When demand is unit elastic, a change in price does not cause any change in total revenue. - Gain in total revenue is exactly the same as loss of total revenue. |
| What should a firm do if they want to increase their revenues and their product is demand inelastic? | - They should decrease their price up to a certain extent. Once the price has reached unit elasticity, their total revenues will start to fall. |
| What should a firm do if they want to increase their total revenues and their product is demand elastic? | - they should increase their prices up to an extent. Once their prices has reached anything further than unit elasticity, their total revenues will begin to fall. (AS PED VARIES ALONG A DEMAND CURVE) |
| Why do many primary commodities have a lower PED in comparison to a PED of a manufactured good? | - Because they are usually necessities and have no substitutes. E.g. Oil, food - The PED of manufactured products are relatively high (Price elastic) because they usually have substitutes and are not a necessity. |
| Why do primary commodities that have inelastic demand and fluctuations in supply cause problems for primary producers? | Because it results in large price fluctuations. This may lead to unstable producer incomes. |
| Why do governments have to consider the PED of the goods being taxed before taxing the good? | Because the lower the PED, (for the taxed good), the greater the government's revenues. - For a good with an inelastic demand, an increase in price( due to tax) will lead to a proportionately smaller decrease in quantity demanded, hence an increase in total revenue (ie. tax revenue). |
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