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Description
Flashcards by ntokozoyende, updated more than 1 year ago
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Created by ntokozoyende
over 10 years ago
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| Question | Answer |
| Price elasticity of demand (PED) | A measure of how much the quantity demanded of a product changes when there is a change in price of the product. |
| PED formula |
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| PED value | Its always treated as positive although its mathematical value is usually negative. |
| Range of PED values |
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| The effects of PED on revenue | |
| PED values and consumer response |
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| Determinants of PED | 1. The number and closelessness of substitutes 2. The necessity of the product and how widely the product is defined 3. The time period considered |
| The number and closelessness of substitutes | 1. The more substitutes=the more elastic the demand for the product 2. The closer the substitutes= the more elastic the demand for the product |
| The necessity of the product and how widely it is defined | 1. The more essential the product, the more inelastic (eg. food) 2. As the product is defined more widely, the more elastic it becomes eg. Meat-> chicken -> wings, fillets, nuggets, patties ->brands |
| Time period considered | PED tends to be more inelastic in the short term and then becomes more elastic the longer the time period it is measured. |
| PED on a demand curve |
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| Why does PED vary along a straight line? |
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| Role of PED for firm decision making regarding price changes and their effect on total revenue |
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| PED for primary commodities vs. PED for manufactured products | Primary commodities have a relatively low PED compared to manufactured goods because they are necessities and have little substitutes. This results in large fluctuations in primary commodity prices over short periods of time. For example, a small decrease in the supply of primary commodities will result in large increases in the price of primary commodities, but a small increase in the price of manufactured goods. |
| PED and government policies (Taxation) | Governments aim to raise revenue and discourage/encourage consumption. The lower the price elasticity of demand for the taxed good, the greater the government tax revenue. |
| Cross price elasticity of demand | A measure of how much the demand of a good changes when there is a change in price of another good, ceteris paribus. |
| XED formula |
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| XED values (Complementary goods vs. Close substitutes) | |
| Why does the absolute value of XED depend on the closeness of the relationship between two goods? | Assuming Xboxs and PS3s are close substitute goods. Absolute value of XED depends on the closeness of the relationship between two goods because if the price of Xbox rises a bit, everyone would switch over to the PS3 and the sales of PS3 may skyrocket. Thus if a small change in price increases/decrease the sales of another product by a significant amount, the absolute value of XED would be high. |
| What are the implications of XED for business if prices of complements/substitutes change? | CED helps to increase the rival consciousness of a firm and plan pricing policies. If a firm has a product that has a high positive CED in relation to his rival’s product, the firm has to respond quickly to change in the price of the rival’s product. Firms can make their goods less substitutable from its rivals so that it is less affected by the pricing policies of the rival firms, through advertising and adding different features to his product to increase product differentiation. (e.g. membership scheme, longer warranty, delivery services) If a firm has a product that has a negative CED in relation to his rival’s product, the firm partner with such firms and link marketing plans to the pricing policy of the other firm. (e.g. package complementary goods together, display same area, stock up goods) |
| Income elasticity of Demand (YED) | The measure of how a change in the overall income level in an economy changes in the demand of a specific product. |
| YED equation | |
| YED values -Normal goods (positive) -Inferior goods (negative) |
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| Necessity goods vs. luxury goods | |
| YED implications for producers and the economy | If incomes are rising, during economic booms, firms could produce goods that are more income elastic, add more features to their products to make it more luxurious, or advertise their products as premium goods. If incomes are falling, during economic downturn, firms could produce goods that are more income inelastic, reduce features from their products to make it more essential, or advertise their products as “value for money” to the budget conscious. Firms can segment his market into different income groups and produce the appropriate range of products to suit consumers of different income groups. |
| Price elasticity of Supply (PES) | A measure of how much the quantity supplied of a product changes when there is a change in the commodity’s own price, ceteris paribus. |
| PED equation |
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| PES values |
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| Determinants of PES | 1. Time period considered 2. Factor mobility 3. Number of firms 4. Stocks and spare capacity 5. Length of production period |
| Time period | a. Longer time period, more elastic b. Short time period, more inelastic c. Take time to change quantity supplied (react to price changes) |
| Factor mobility | a. Quicker resources can be shifted, more elastic b. Ease and speed firms can shift resources from one industry to another |
| Number of firms | a. Greater number of firms, more elastic |
| Stocks and Spare Capacity | a. More ease in storing goods, more elastic b. More spare capacity, more elastic |
| Length of Production Period | a. Shorter length of production period, more elastic |
| PES of primary commodities vs. manufactured products | The PES for primary commodities is relatively low because a change in price cannot lead to a proportionately large increase in quantity supplied. The PES for manufactured products is relatively high because it is easier to increase or decrease quantity supplied in response to a change in price. |
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