Economics - Chapter 5 (Xped, Yed, Pes)

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  • Created by: sammilaw
  • Created on: 11-03-15 20:17
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  • Economics - Chapter 5
    • Elasticity
    • Cross price elasticity of demand (Xped)
      • Positive = substitutes
        • Close substitutes: small rise in the price of X = large rise in demand for Y
        • Weak substitutes: A large rise in price of X = small rise in demand for Y
      • Negative = complementary
        • Close complements: A small fall in the price of X = large rise in demand for Y
          • i.e. cinema tickets (X) and popcorn (Y)
        • Weak complements: A large fall in the price of X = small rise in demand for Y
          • i.e. sun cream (X) and foreign holidays (Y)
    • Income elasticity of demand (Yed)
      • Above 1 = demand is income elastic (normal good)
        • i.e. luxury goods, holidays
      • Between 0-1 = demand is relatively unresponsive to income (income inelastic)
        • i.e. water, gas (necessity goods)
      • Below 0 = demand falls when incomes rise (inferior good)
        • i.e. cheap bread
    • Price elasticity of supply (Pes)
      • Below 1 = price inelastic
        • Firms find it hard to change production in a given time period
        • If D increases and S is perfectly inelastic, then price rises and quantity doesn't change.
        • If S increases and D is perfectly inelastic, then price falls and quantity doesn't change.
      • Above 1 = price elastic
        • Producers can increase output without a rise in cost or a time delay
        • If D increases and S is perfectly elastic, then price stays the same and quantity rises.
        • If S increases and D is perfectly elastic, then price stays the same and quantity rises.
      • Factors affecting PES:
        • Time
        • Supply of raw materials
        • Availability of stock
        • Ease of switching between alternative production
        • Availability of space capacity
        • Number of firms
        • Ability to alter production methods

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