Elastisity
- 2. Price Elasticity of DemandPrice Elasticity of Demand (PED): a measure of the responsiveness of the quantity demanded of a good or service to a change in its price.PED = (% change in quantity demanded) / (% change in price)Elastic demand: a change in the price of a good or service will cause a proportionately larger change in the quantity demanded.Inelastic demand: a change in the price of a good or service will cause a proportionately smaller change in quantity demanded.
- 7. Cross Elasticity of DemandCross Elasticity of Demand (XED): a measure of the responsiveness of the demand for a good or service to a change in the price of a related good.XED = (% change in quantity demanded for X) / (% change in price of Y)Substitute goods: goods that can be used instead of each other, such as pepsi and coke. They have positive XEDComplement goods: goods which are used together, such as oreo and milk. They have negative XED.
- 8. Income Elasticity of DemandIncome Elasticity of Demand (YED) a measure of the responsiveness of demand for a good to change in income.YED = (% change in quantity demanded) / (% change in income)Normal good: has a positive YED. As income rises, demand increases.Inferior good: has a negative YED. As income rises, demand decreases.
- 9. Price Elasticity of SupplyPrice Elasticity of Supple (PES): a measure of the responsiveness of the quantity supplied of a good or service to a change in its price.PES = (% change in quantity supplied) / (% change in price)
- 10. TaxIndirect tax: an expenditure tax on a good or service. An indirect tax is shown on a supply and demand diagram as an upward shift in the supply curve, where the vertical distance between the two supply curves represents the amount of tax.Specific tax: shown as a parallel shift.Ad Valorem tax: shown as a divergent shift.Incidence (burden): incidence of a tax is the amount of tax paid by the producer/consumer. If the demand for a good is inelastic the greater incidence of the tax falls on the consumer. If the demand for a good is elastic, the greater incidence of the tax falls on the producer.