Elasticity

• Price elasticity of demand (PED):

  • Measures the responsiveness of demand to changes in price
  • Unitary elastic PED is where quantity demanded changes by the same percentage as price
  • Relatively elastic PED is where quantity demanded changes by a larger percentage than price
  • Relatively inelastic PED is where quantity demanded changes by a smaller percentage than price
  • Perfectly elastic PED means quantity falls to 0 with a price change
  • Perfectly inelastic PED means price change has no effect on output
• Factors influencing PED:

  • Availability of substitutes affects elasticity
  • Time influences elasticity
  • Necessity of the good affects elasticity
  • Percentage of total expenditure spent on the good affects elasticity
  • Addictiveness of the good affects elasticity
• Income elasticity of demand (YED):

  • Inferior goods have YED<0: a rise in income leads to a fall in demand for the good
  • Normal goods have YED>0: a rise in income leads to a rise in demand for the good
  • Luxury goods are a type of normal good with YED>1
• Cross elasticity of demand (XED):

  • Substitutes have XED>0: an increase in the price of good B will increase demand for good A
  • Complementary goods have XED<0: an increase in the price of good B will decrease demand for good A
  • Unrelated goods have XED=0: a change in the price of good B has no impact on good A
• Factors affecting PES (Price Elasticity of Supply):

  • Time affects the elasticity of the supply curve
  • Stocks influence the elasticity of supply
  • Working below full capacity affects the elasticity of supply
  • Availability of factors of production impacts the elasticity of supply
  • Ease of entry into the market affects the elasticity of supply
  • Availability of substitutes influences the elasticity of supply
• Price elasticity of demand (PED) measures the responsiveness of quantity demanded given a change in price
• Unit price elasticity occurs when the PED number is 1
• Factors influencing price elasticity of demand (PED):

  • Substitutes: More substitutes lead to more price inelastic demand
  • Percentage of income: Greater percentage of income affected leads to more price elastic demand
  • Luxury vs. necessity: Luxuries tend to have more price inelastic demand
  • Addictive or habit-forming goods: Addictive goods have price inelastic demand
  • Time period: Short run demand is price inelastic, long run demand is more price elastic
• Drawing demand curves based on elasticity:

  • Price inelastic demand: Steep demand curve
  • Price elastic demand: Shallow demand curve
• Price elasticity of demand (PED) is crucial for businesses when making pricing decisions to increase their total revenue
• Price Elasticity of Demand (PED) relationship:

  • Elastic: Price changes and Total Revenue move in opposite directions
  • Inelastic: Price changes and Total Revenue move in the same direction
• Price elasticity of supply (PS) measures the responsiveness of quantity supplied given a change in price
• Interpreting elasticity:

  • PS > 1 = price elastic (quantity supplied changes proportionally more than the change in price)
  • PS < 1 = price inelastic (quantity supplied changes proportionally less than the change in price)
  • PS = 0:
  • Perfectly price inelastic (quantity supply never changes regardless of price change)
  • Infinity = perfectly price elastic
  • Unit price elastic
• Determinants of price elasticity of supply:

  • Production lag: longer lag = more price inelastic supply
  • Level of stocks: larger stocks = more price elastic supply
  • Spare capacity: more spare capacity = more price elastic supply
  • Substitute ability of factors of production: more substitutable factors = more price elastic supply
  • Time period: short-run = price inelastic, long-run = price elastic
• Cross elasticity of demand (XED) measures the responsiveness of quantity demanded of one good or service given a change in price of another
• Income elasticity of demand (YED) measures the responsiveness of quantity demanded given a change in income
• Price elasticity of demand (PED) is crucial for businesses when making pricing decisions to increase total revenue
• Price elasticity of supply (PES) is important for businesses to ensure flexible production
• Elasticity calculations are estimates and may not always be fully reliable due to data collection methods and changes in consumer habits
• Midpoint of the demand curve always has an elasticity of one or minus one, representing unit elasticity