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Elasticities - Coggle Diagram
Elasticities
Income elasticity of demand (YED)
YED - measures the extent to which the demand for a good changes in response to a change in income.
YED = % change in QD / % change in Y
luxury good
Income elastic - YED > 1 % change in income will lead to a greater than proportionate change in quantity demanded % change in QD > % change in Y
normal good
Income inelastic - YED = 0-1 % change in income will lead to a smaller than proportionate change in quantity demanded % change in Y > % change in QD
negative = inferior good
Cross price elasticity of demand (XPED)
XPED - measures the extent to which the demand for a good changes in response to a change in the price of another good.
XPED = % change in QD a / % change in P b
positive = substitutes
Elastic - the % change in the price of substitute a will lead to a greater than proportionate % change in demand for the good b
Inelastic - the % change in the price of substitute a will lead to a smaller than proportionate % change in demand for the good b
negative = complements
Elastic - the % change in the price of substitute a will lead to a greater than proportionate % change in demand for the good b
Inelastic - the % change in the price of substitute a will lead to a smaller than proportionate % change in demand for the good b
Price elasticity of demand (PED)
PED - measures the extent to which the demand for a good changes in response to a change in the price of that good.
PED = % change in QD / % change in P
Factors that affect PED
Substitutability
less alternatives = more inelastic, more alternatives = more elastic
% of income
small amount = more inelastic, large amount = more elastic
Degree of necessity
necessity = more inelastic, luxury = more elastic
Time
short term = more inelastic, long term = more elastic
Addictive
more = more inelastic, less = more elastic
Price elasticity of supply (PES)
PES - measures the extent to which the supply for a good changes in response to a change in the price of that good.
PES = % change in QS / % change in P
Factors that affect PES
The length of production time
Longer = more inelastic, Shorter = more elastic
The availability of spare capacity
less SC = more inelastic, more SC = more elastic
The availability of stocks
less stocks = more inelastic, more stocks = more elastic
Raw materials supply
less RM = more inelastic, more RM = more elastic
The ease of switching between alternative methods of production harder = more inelastic, easier = more elastic
The number of firms in the market and the ease of entering it more firms and easy = more elastic, less firms and hard = more inelastic
Time
immediate supply= more inelastic, short term = less inelastic, long term = more elastic