Elasticity of Demand

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  • Created by: lizaloo98
  • Created on: 07-04-16 17:00
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  • Elasticity of Demand
    • PED
      • price elasticity of demand
        • percentage change in quantity demanded over percentage change in price
          • >1  means this is a price ELASTIC good/service
            • so the percentage change in quantity demanded is greater than the percentage change in price
            • there is a greater response to a change in price
              • in this case firms will find it more advantageous to reduce price as, this way they would gain more revenue
          • Untitled
        • the responsiveness of quantity demanded to a change in price
      • – elastic - relative change in Q is greater than relative change in P - responsive to a change in price – a fall in price will lead to an increase in revenue – a rise in price will lead to a fall in revenue – likely to indicate substitutes
        • The estimate is elastic (1) elaboration of what this means (1) confirming the IEA’s survey findings that motorists are driving less (1) and spending less on petrol (1) numerical example (2)
      • factors affecting PED
        • time period
          • the longer the more elastic as consumers can respond to changes in habbits and are more aware of substitutes
        • the proportion of income the good/service takes up
          • the more expensive the more elastic as with a popular good, the lower the price the more demanded
        • the availability and closeness of sustitutes
          • the more available and close the more elastic
      • changes as you move along curve
    • YED
      • income elasticity of demand
        • the responsiveness of quantity demanded to a change in incomes
        • percentage change in quantity demanded over percentage change in incomes
        • +'e means that it is a normal good
          • a good that is bought more as income rises
          • e.g. wine
          • luxury
          • if big and positive it is called a superior good
        • -'ve means that it is an inferior good
          • a good that is bought less as income rises
          • shop brand bread
          • necessity
        • YED is inelastic/demand is income inelastic (1) Demand is insensitive/responds less than proportionally to changes in income (1) Normal good (1) As income rises demand for the product will increase/ as income falls demand for the product will fall (1)
    • XED
      • cross elasticity of demand
        • the responsiveness to a change in quantity demanded of one product to a change in price of another product
        • the percentage change of quantity demanded for product Y, over percentage change in price of product X
      • ='ve = SUBSTITUTES
      • -'ve = COMPLIMENTS
      • =0 no relationship
      • shows the strength of bond between 2 products
    • elasticity is the extent to which buyers and sellers respond to changers in the market

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