elasticity of demand & supply

• define price elasticity of demand:

  % change of quantity demanded / change of price
• define price elasticity of supply:

  % change of quantity supplied / change of price
• PED determinants: (S)AINT

  availability & closeness of Substitutes -- greater means more price elastic cuz consumers can readily switch to other products that satisfy the same want
• PED determinants: S(A)INT

  Addiction -- greater means more price INELASTIC as consumers are more willing to pay more to satisfy their addiction
• PED determinants: SA(I)NT

  proportion of Income spent on the good -- greater means more price elastic as there will be a more significant reduction in consumer's income or purchasing power
• PED determinants: SAI(N)T

  degree of Necessity -- greater means more price INELASTIC as the good is somethings the consumer cannot do without
• PED determinants: SAIN(T)

  Time period -- longer means more price elastic as consumers can spend more time to make better purchasing decisions to get better information on the availability of substitutes, compare prices, or adapt to their changing tastes and preferences
• PES determinants: (M)EAT

  Mobility of factors of production (ease = elastic)

  • geographical mobility - ease with moving between physical locations
  • occupational mobility - ease when moving between different industries (however, it will be price inelastic when the job require specialized/ high skills)
• PES determinants : M(E)AT

  Existence of spare capacity -- there will be a greater price elasticity when firm's capacity is not fully utilised. This means that firms can increase their production more easier
• PES determinants: ME(A)T

  Availability of stock -- larger means firms can respond better to price changes (more price elastic).

  When firms do not have enough stock, it is difficult to respond to an increase in quantity demanded by increasing the supply of their goods
• PES determinants: MEA(T)

  Time period -- more means firms can respond better to price changes by flowing more resources into an industry through the expansion of existing firms
• When 0<PE(D/S)<1,

  PED: consumers are insensitive to price change (price inelastic demand).

  PES: producers are not willing to enter the market (price inelastic supply)
• When PE(D/S)>1,

  PED: Consumers are sensitive to the price change (price elastic demand)

  PES: producers are willing and it is easier for them to enter the market (price elastic supply)
• signs for PED & PES:

  PED: negative sign as Law of demand states that quantity demanded is inversely related to its price.

  PES: positive sign as Law of Supply states that quantity supplied is directly related to its price.
• formulas for PED/PES:

  PED: % change of quantity demanded / change of price

  
  

  PES: % change of quantity supplied / change of price
• Perfectly Price Inelastic Demand/Supply PED/S = 0:

  a given change in the price of the good itself produces no change in the quantity demanded/supplied, ceteris paribus. totally unresponsive when price changes (vertical line)
• Perfectly Price Elastic Demand/Supply |PED/S| -> infinity:

  a given change in price of good leads to an infinitely large change in quantity demanded/supplied, ceteris paribus. totally responsive when price changes (horizontal line)
• Unnitary Price Elastic Demand/Supply |PED/S| =1:

  when change in price of the good results in a proportionate change in quantity demanded/supplied of the good in same direction, ceteris paribus