Elasticity (Edexcel IGCSE Economics): Flashcards

Demand is perfectly elastic when quantity demanded falls to zero with any change in price, giving a PED of infinity.

The determinants of PED are the factors that determine how responsive the quantity demanded of a product is to a change in its price.

Total revenue is the amount of money a firm receives from selling its goods or services, calculated as price × quantity.

The total revenue rule states that to maximise revenue, firms should increase the price of products that are inelastic in demand and decrease the price of products that are elastic in demand.

Good availability of substitutes results in a higher value of PED, making demand relatively elastic.

Addictiveness turns products into necessities, resulting in a low value of PED, making demand relatively inelastic.

The lower the proportion of income the price represents, the lower the PED value, as consumers are less responsive to price changes on cheap products.

A firm can use price discrimination by charging higher prices to segments with inelastic demand and lower prices to segments with elastic demand.

Consumers are less responsive to price changes, so firms can pass the tax on to consumers, allowing the government to raise tax revenue.

True.

In the short term demand is relatively inelastic, but over a longer period consumers find substitutes and PED rises.

False.

Quantity demanded still falls, but by a less than proportional amount than the rise in price.

Good availability of substitutes results in a higher value of PED, making demand relatively elastic.

Over a longer time period, consumers are better able to find substitutes, so the value of PED rises.

Price elasticity of supply (PES) measures how responsive the quantity supplied of a product is to a change in its price.

The law of supply states that, ceteris paribus, an increase in price leads producers to increase the quantity supplied, and vice versa.

Perfectly inelastic supply (PES = 0) is where quantity supplied is completely unresponsive to a change in price, such as the fixed number of seats in a theatre.

PES = % change in quantity supplied ÷ % change in price.

A percentage change is calculated as (new value − old value) ÷ old value × 100.

A PES value between 0 and 1 means supply is relatively inelastic, as the percentage change in quantity supplied is less than proportional to the percentage change in price.

A supply curve drawn from the origin has a PES value of 1, showing unitary elasticity where the % change in price equals the % change in quantity supplied.

The PES is 0.15 (9.1% ÷ 61%), showing avocados are very price inelastic in supply.

True.

When PES lies between 1 and infinity, the % change in quantity supplied is more than proportional to the % change in price.

True.

PES values vary from 0 (perfectly inelastic) up to infinity (perfectly elastic).

The responsiveness of quantity supplied to a price change is different for different types of products.

A supply curve with a PES of infinity is described as perfectly elastic.

The determinants of PES are the factors that determine how responsive the quantity supplied of a product is to a change in price, such as mobility of factors, ability to store, spare capacity and time period.

Spare capacity is the ability of factories to produce more output; where it exists, supply is more elastic.

Primary commodities are agricultural products or raw materials, which tend to have a lower (more inelastic) PES than manufactured products.

If products can be easily stored, PES is higher (elastic) because producers can quickly increase supply; an inability to store lowers PES.

If producers can quickly switch resources between products, PES is more elastic.

Primary commodities have longer production cycles, limited storage and less spare capacity, so producers cannot easily respond to price changes, giving a lower PES.

A firm can increase its PES by creating more spare capacity, holding larger inventories or using more modern technology.

If the PES of housing is low (inelastic), property prices become unaffordable when demand increases, as supply cannot respond quickly.

True.

Manufactured products can be stored, mass-produced and made quickly, so their supply is more elastic than primary commodities.

True.

With an inelastic PES of labour, firms cannot quickly hire extra workers, so production costs rise sharply as demand increases.

True.

With inelastic supply, firms cannot respond to rising demand, so prices continue to rise, possibly causing inflation.

A producer with a high PES can respond quickly to a price rise, allowing it to increase its revenues and profits.

In the long run, producers can change all their factors of production, so their supply becomes more elastic.

Income elasticity of demand (YED) measures how responsive the quantity demanded of a product is to a change in income.

A normal good has a positive YED, meaning demand increases as income rises; it can be a necessity or a luxury.

An inferior good has a negative YED, meaning demand decreases as income rises.

YED = % change in quantity demanded ÷ % change in income.

The YED is 1 (25% ÷ 25%).

A good with a YED between 0 and 1 is a normal necessity, which is income inelastic.

A good with a YED greater than 1 is a normal luxury, which is income elastic.

During a recession incomes fall, so demand for inferior goods increases.

Necessity goods are income inelastic, so demand changes little with income, guaranteeing tax revenue even in a recession.

True.

Inferior goods have a negative YED, so as incomes rise during economic growth their demand falls.

True.

As incomes rise during economic growth, demand for normal goods increases.

A change in consumers' income leads to a change in the demand for goods and services.

Governments can reduce inequality by cutting taxes on lower-income earners, raising their spending on goods such as healthcare and education.