Elasticity
Visão Geral
Put a 10% tax on cigarettes and sales barely move, but put the same 10% tax on cinema tickets and audiences shrink sharply. Both are price rises of the same size, yet the reaction of buyers is completely different. Elasticity is the single number that captures exactly how sensitive, or how insensitive, demand or supply is to a change in price or income, and it is one of the most powerful tools in a business's or a government's toolkit.
In this lesson you will work through all three elasticity measures on the 4EC1 specification in full: price elasticity of demand, price elasticity of supply, and income elasticity of demand. For each you will learn the formula, how to calculate it from percentage changes, how to read its sign and size, what determines it, and why it matters to a business deciding whether to raise its prices or to a government deciding what to tax.
Objetivos
- Definition of price elasticity of demand (PED)
- Formula of PED
- Calculate the PED using given percentage changes in quantity demanded and percentage changes in price
- The use of diagrams to show price elastic and price inelastic demand
- Interpret numerical values of PED that show perfect price inelasticity, price inelasticity, unitary price elasticity, price elasticity, perfect price elasticity
- The factors influencing PED, including substitutes, degree of necessity, percentage of income spent on goods or service, time
- Use of total revenue calculations to show the relationship between a change in price and the change in total revenue, to determine whether demand is price elastic or price inelastic
- Definition of price elasticity of supply (PES)
- Formula of PES
- Calculate the PES using given percentage changes in quantity supplied and percentage changes in price
- The use of diagrams to show price elastic and price inelastic supply
- Interpret numerical values of PES that show perfect price inelasticity, price inelasticity, unitary price elasticity, price elasticity, perfect price elasticity
- The factors influencing PES, including factors of production, availability of stocks, spare capacity, time
- Use examples to show the likely PES for manufactured and primary products
- Definition of income elasticity of demand
- Formula of income elasticity of demand
- Calculate the income elasticity of demand using given percentage changes in quantity demanded and percentage changes in income
- Interpret numerical values of income elasticity of demand that show luxury goods, normal goods, inferior goods
- The significance of price and income elasticities of demand to businesses and the government, in terms of the imposition of indirect taxes and subsidies, and changes in income
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- The price of a good rises by 10% and quantity demanded falls by 25%. The PED is: A) -0.4 B) -2.5 C) +2.5 D) +0.4 Answer: B
- A PED value of exactly 0 describes: A) Perfectly price elastic demand B) Unitary price elasticity C) Perfectly price inelastic demand D) Perfectly price elastic supply Answer: C
- If demand is price inelastic, a rise in price will cause total revenue to: A) Increase B) Decrease C) Stay exactly the same D) Fall to zero Answer: A
- A good with a YED of -0.6 is best described as: A) A luxury good B) A normal, necessity good C) An inferior good D) A good with perfectly elastic supply Answer: C
- Agricultural products such as wheat tend to have a low PES mainly because: A) They have many close substitutes B) They are luxury goods C) Production is tied to a growing season and cannot be expanded quickly D) Consumers spend a small share of income on them Answer: C
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Secção do manual
Price Elasticity of Demand and Price Elasticity of Supply
Calculate the price elasticity of demand
"Principles of Economics 2e: Price Elasticity of Demand and Price Elasticity of Supply" by OpenStax, OpenStax, Rice University, licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). Source: https://openstax.org/books/principles-economics-2e/pages/5-1-price-elasticity-of-demand-and-price-elasticity-of-supply. Access for free at https://openstax.org/books/principles-economics-2e/pages/1-introduction
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Secção do manual
Polar Cases of Elasticity and Constant Elasticity
Differentiate between infinite and zero elasticity
"Principles of Economics 2e: Polar Cases of Elasticity and Constant Elasticity" by OpenStax, OpenStax, Rice University, licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). Source: https://openstax.org/books/principles-economics-2e/pages/5-2-polar-cases-of-elasticity-and-constant-elasticity. Access for free at https://openstax.org/books/principles-economics-2e/pages/1-introduction
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