Economics - Chapter 5 (Xped, Yed, Pes)
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- Created on: 11-03-15 20:17
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- Economics - Chapter 5
- Elasticity
- Cross price elasticity of demand (Xped)
- Positive = substitutes
- Close substitutes: small rise in the price of X = large rise in demand for Y
- Weak substitutes: A large rise in price of X = small rise in demand for Y
- Negative = complementary
- Close complements: A small fall in the price of X = large rise in demand for Y
- i.e. cinema tickets (X) and popcorn (Y)
- Weak complements: A large fall in the price of X = small rise in demand for Y
- i.e. sun cream (X) and foreign holidays (Y)
- Close complements: A small fall in the price of X = large rise in demand for Y
- Positive = substitutes
- Income elasticity of demand (Yed)
- Above 1 = demand is income elastic (normal good)
- i.e. luxury goods, holidays
- Between 0-1 = demand is relatively unresponsive to income (income inelastic)
- i.e. water, gas (necessity goods)
- Below 0 = demand falls when incomes rise (inferior good)
- i.e. cheap bread
- Above 1 = demand is income elastic (normal good)
- Price elasticity of supply (Pes)
- Below 1 = price inelastic
- Firms find it hard to change production in a given time period
- If D increases and S is perfectly inelastic, then price rises and quantity doesn't change.
- If S increases and D is perfectly inelastic, then price falls and quantity doesn't change.
- Above 1 = price elastic
- Producers can increase output without a rise in cost or a time delay
- If D increases and S is perfectly elastic, then price stays the same and quantity rises.
- If S increases and D is perfectly elastic, then price stays the same and quantity rises.
- Factors affecting PES:
- Time
- Supply of raw materials
- Availability of stock
- Ease of switching between alternative production
- Availability of space capacity
- Number of firms
- Ability to alter production methods
- Below 1 = price inelastic
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