Elasticity: Price Elasticity of Demand

Unitary Elastic demand

A change in price leads to a proportionately equal change in the quantity demanded. PED = 1

Price Elastic Demand

A change in price leads to a proportionately greater change in the quantity demanded. PED greater than (-)1

Price inelastic demand

A change in price leads to a proportionately smaller change in the quantity demanded. PED less than (-) 1

Perfectly Inelastic demand

A change in price leads to no change in the quantity demanded PED = 0

Inferior good (define)

good for which higher income decreases demand (and vice versa)

A change in price, would cause a ______________ along the demand curve

movement

Imagine a demand-supply diagram. If there is a fall in price, what excess would be created?

Excess demand

Imagine a demand-supply diagram. If there is an increase in price, what excess would be created?

Excess supply

Luxury goods (YED value)

YED is positive and greater than 1

Inferior good (YED value)

YED value is negative

Income elasticity of demand (formula)

% change in quantity demanded / % change in income

PED formula

% change in quantity demanded / % change in price

Determinants of PED

-Number of close substitutes -Degree of necessity -Addictiveness -Proportion of income - Time period

Factors that influence supply

1. Cost of inputs/resources 2. Technology 3. Supply shocks (eg natural disasters) 4. Subsidies 5. Indirect taxes

Factors that influence demand

1. Price 2. Consumer income 3. Price expectations 4. Tastes and preferences 5. Price of related goods

Normal goods (define)

Good for which higher income increases demand (and vice versa)

Define supply

The desire, ability, and willingness for firms to produce a good or service at a given price at a given period of time

Define demand

The desire, ability, and willingness to buy a good or service at a given price at a given period of time

Effects of increased price of inelastic goods on revenue

Total revenue for firms is increased.

Effects of increased price of elastic good on revenue

Total revenue for firms is reduced.

Necessity goods (YED value)

YED is positive and between 0 and 1.

Income elasticity of demand (definition)

a measure of the degree of responsiveness of quantity demanded to a change in incomes

Price Elasticity of Demand (PED)

a measure of the responsiveness of the quantity demanded of a good or service to changes in its own price.

Total Revenue (TR)

the amount of money received by firms for selling a good or service. Price of the good (P) multiplied by the quantity sold (Q): P × Q