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Economics Notes on Chapter 6
There are four main elasticities:
Price elasticity of demand: PED is a measure of responsiveness of the quantity of a
good or service demanded to changes in its price.
An infinite elasticity demand curve would be a direct horizontal line, and a zero elasticity
of demand would be a direct vertical line. The factors which affect PED are whether the
good is a necessity or a luxury (ie. A large change in price would not change the quantity
demanded as much if the good was a necessity, and therefore the good would be inelastic).
Also the time period and how long it takes the good to respond to a price change (i.e. if
price of petrol rises much higher than that of petrol motorists take a long time to respond
as they need to buy a new car).
Price elasticity of supply: : PES is a measure of responsiveness of the quantity of a
good or service supplied to changes in its price.
As with demand a completely inelastic good would have a vertical supply curve and a pure
elastic good would have a vertical supply line. The factors that affect PES are length of the
production period, how long it takes to produce the good, the number of firms in the
market (the more firms the easier it is to produce the good). The availability of spare
capacity (if raw materials and labour are easily available supply can be increased quicker),
the ease of accumulating new stocks (firms can therefore increase supply quickly). Also
the ease of switching to alternative methods of production, the number of firms entering
the market and time.
income elasticity of demand : IED is a measure of responsiveness of the quantity of
a good or service demanded to changes in income.
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It depends on whether the god is normal or inferior; (negative for inferior, positive for
normal). This is because demand for a normal good increases with an increase of income,
whereas and increase in income decreases the demand for an inferior good.
cross-elasticity of demand: measures how the demand for one good responds to
changes in the price of another good.
There are 3 possibilities between the links in the two goods.…read more
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