Glossary: Topic 5
Topic 5: Elasticities:
Elasticity = measure of responsiveness; measures how much something changes when there is a change in one of the factors that determines it.
Elasticity of demand = measure of how much the demand for a product changes when there is a change in one of the factors that determine demand:
- Price elasticity of demand (PED) – measure of how much the quantity demanded of a product changes when there is a change in the price of the product:
Percentage change in quantity demanded of the product
Percentage change in price of product
- Negative value indicates inverse relationship
- Possible range values = zero to infinity
- PED is zero = change in price of a product will have no effect on the quantity sold – perfectly inelastic
- PED is infinity = if price changes even slightly, the demand falls to zero, perfectly elastic
- Inelastic = value is less than one; change in price leads to a smaller change in demand; if a firm has an inelastic product, they should raise the price
- Elastic = value is greater than one; change in price leads to a larger change in demand; if price is changed, the demand will fall more by comparison; if a firm has an elastic product, they should not raise the price of the product
- Unit Elastic Demand = value is equal to one; a change in price will lead to a large, opposite, change in the quantity of demand; if the price is raised by a certain percentage, then the quantity demanded will fall by the same percentage, meaning the revenue will not change
- As the price of a product goes lower, so does the value of elasticity; low priced products should have a more inelastic demand than high-priced products, because consumers are less concerned with the price of inexpensive products
- Determinants of PED: