What is Price Elasticity of Demand
Measure of showing the relationship between price and quantity demanded
1 of 37
Formula for PED
% change in quantity demanded / % change in price
2 of 37
When PED = 0
Perfectly inelastic: demand doesn't change when price does
3 of 37
When PED > 1
Elastic: greater the value of the co-efficient the more elastic
4 of 37
When PED < 1
Inelastic: great change in price does not affect demand as much
5 of 37
Factors Influencing PED
Amount of substitutes, Price related to income, Brand Loyalty/ Habitual consumption, degree of necessity/luxury
6 of 37
When Inelastic
Total revenue falls and demand curve is steeper
7 of 37
When elastic
Total revenue rises demand curve is shallower
8 of 37
Unitary Elastic
change in price is proportional to change in demand, curved demand curve
9 of 37
What happens to elasticity as you move down the demand curve
10 of 37
Why is PED useful for producers
shows affect of a change in price on total revenue, shows price volatility(important for commodity producers), shows effect of indirect tax on price and quantity demanded
11 of 37
What is price discrimination
when a producer charges different prices for the same product to different parts of the market, businesses will charge higher to consumers that are demand inelastic
12 of 37
Problems with PED
Inaccurate or incomplete data, PED varies across regions, varies between product ranges e.g. economy and premium products
13 of 37
What is YED
measure of how responsive demand is when a persons real income changes
14 of 37
Formula for YED
%change in quantity demanded/ % change in real income
15 of 37
when YED > 1
Income elastic: large change in income results in greater change in demand
16 of 37
When YED < 1
Income Inelastic change in income doesn't affect change in demand as much
17 of 37
Normal necessities
YED positive greater than 0, are income inelastic
18 of 37
Normal luxuries
YED positive greater than 0, income elastic
19 of 37
Inferior goods
Increase in income means demand decreases YED negative <0, causes inward shift of demand curve when in periods of economic growth, in period of recessions demand increases
20 of 37
What is PES
measure of the relationship between change in quantity supplied and a change in the good's own price
21 of 37
When PES>1
price elastic
22 of 37
When PES<1
price inelastic
23 of 37
PES = 0
perfectly inelastic
24 of 37
When PES = infinity
perfectly elastic following a change in demand
25 of 37
Factors affecting PES
Spare production capacity, stocks of finished products and components, ease and cost of factor substitution, time period and production speed
26 of 37
When PES is elastic the supply curve looks
27 of 37
When PES is inelastic the supply curve looks
28 of 37
What is XED
Measure of the responsiveness of demand for good X following a change in price of related good Y
29 of 37
competitive demand, increase in price of one good leads to an increase in demand for rival prosecute, XED for two substitutes is always positive
30 of 37
joint demand, fall in price of one leads to increase in demand for other, XED always negative
31 of 37
Formula for XED
%change in demand for goodX/ % change in price for goodY
32 of 37
Unrelated products
XED = 0
33 of 37
Demand curve for strong substitutes
34 of 37
Demand curve for weak substitutes
35 of 37
Demand curve for close complements
36 of 37
Demand curve for weak compliments
37 of 37

Other cards in this set

Card 2


Formula for PED


% change in quantity demanded / % change in price

Card 3


When PED = 0


Preview of the front of card 3

Card 4


When PED > 1


Preview of the front of card 4

Card 5


When PED < 1


Preview of the front of card 5
View more cards


No comments have yet been made

Similar Economics resources:

See all Economics resources »See all Elasticity resources »