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Economics 1.2.3 - Coggle Diagram
Economics 1.2.3
PED
relationship with revenue
revenue = quantity x price
elastic = large change in revenue
inelastic = small change in revenue
PED = 1 is where revenue is maximised
helps firms decide how much to produce
shown as the area under the graph
measures the responsiveness of quantity demanded to changes in price
% change in quantity demanded/ % change in price
will always be negative due to inverse relationship
0 = perfectly price inelastic
vertical
<1 = inelastic
1 = unitary
1 = price elastic
infinity = perfectly price elastic
horizontal
YED
measures the responsiveness of quantity demanded to change in income
% change in quantity demanded / % change in income
normally positive (normal goods)
luxury goods
inferior goods are where a fall in income leads to an increase in the quantity demanded
fast food
value food
public transport
<0 = inferior goods
0-1 = normal inelastic good
1 = normal elastic good
factors affecting elasticities
time
long run = elastic
short run = inelastic
influence of habit
inelastic if they are addictive
luxuries are price inelastic
necessities are price elastic
availability of substitutes
low number of substitutes means the good is price inelastic
high number of substitutes means good is price elastic as consumers can switch to alternatives
proportion of income for which the good accounts
basic goods are price inelastic
luxury goods are price elastic
width of market definition
the more widely the good is defined, the fewer substitutes and more inelastic in demand it is
cost of switching suppliers
e.g. contract costs to leave
brand loyalty
uses of elasticities
deciding pricing strategies
governments can decide on tax or subsidy figures
useful to know how much sales will change during booms or recessions
idea of which sectors increase sales rapidly
cross elasticities for rival products
XED
measures the responsiveness of quantity demanded of good X to change in price of good Y
% change in quantity demanded of good X / % change in price of good Y
negative = complementary goods
positive = substitutes