Elasticity
- Created by: abbienoice
- Created on: 02-11-21 15:45
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- Elasticity
- price elasticity of demand (PED)
- a measurement of the responsiveness of demand to a change in price
- PED = %change in quantity demanded / %change in price
- - (< 1) = inelastic demand
- - (>1) = elastic demand
- income elasticity of demand (YED)
- a measurement of the responsiveness of demand to a change in income
- normal goods - demand rises if income rises
- + YED
- inferior goods - demand falls if income rises
- - YED
- YED = %change in quantity demanded / % change in income
- >1 = normal + elastic
- < 1 = normal + inelastic
- >-1 = inferior + elastic
- < -1 = inferior + inelastic
- cross elasticity of demand (XED)
- substitutes - a good or service that consumers might consider an alternative for another
- always positive
- an increase in the price of a product will lead to and increase in demand for its substitute
- complements - goods or services that are often bought together
- always negative
- an increase in price of one product will lead to a decrease in demand for its complement
- a measurement of the responsiveness of demand for one product to changes in price of another
- XED = %change in quantity demanded of good X / %change in the price of good Y
- substitutes - a good or service that consumers might consider an alternative for another
- price elasticity of supply (PES)
- PES = %change in quantity supplied / %change in price
- < 1 = inelastic
- >1 = elastic
- a measurement of the responsiveness of supply to changes in price
- factors affecting elasticity of supply
- availability of stock
- availability of spare capacity
- ability to switch production
- ability of new firms to enter market
- time
- length of production period
- PES = %change in quantity supplied / %change in price
- elastic - change in price leads to a bigger change in demand/supply
- inelastic - change in price leads to smaller change in demand/supply
- what determines elasticity?
- lots of substitutes
- more elastic
- necessities or luxuries
- relatively cheap
- less elastic
- width of the market definition
- time
- consumers ignorant to alterative prices
- less elastic
- difficult to change spending
- lots of substitutes
- price elasticity of demand (PED)
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