economics (elasticities)

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price elasticity of demand (PED)

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Economics

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1

price elasticity of demand (PED)

measures how much demand for a product will change if the price changes

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2

PED formula

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3

inelastic demand

IF PED IS LESS THAN 1 when a % change in price results in a lower % change in demand increase in price will cause an increase in total revenue decrease in price will cause a decrease in total revenue

<p>IF PED IS LESS THAN 1 when a % change in price results in a lower % change in demand increase in price will cause an increase in total revenue decrease in price will cause a decrease in total revenue</p>
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4

elastic demand

IF PED IS GREATER THAN 1 when a change in % in price results in a greater change in % demanded firm should NOT raise their prices because a rise in price would result in less revenue firms should lower their prices

<p>IF PED IS GREATER THAN 1 when a change in % in price results in a greater change in % demanded firm should NOT raise their prices because a rise in price would result in less revenue firms should lower their prices</p>
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5

unit elastic demand

IF PED IS = 1 when a % change in price results in an equal % change in demand a change in price will result in NO change in total revenue$

<p>IF PED IS = 1 when a % change in price results in an equal % change in demand a change in price will result in NO change in total revenue$</p>
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6

perfectly inelastic demand

IF PED IS = 0 when a change in price results in NO change in quantity demanded people that need it need it

<p>IF PED IS = 0 when a change in price results in NO change in quantity demanded people that need it need it</p>
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7

determinants of PED

S- substitutes P- proportion of income L- luxury or necessity? A- addictive T- time

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8

substitutes (PED)

determinant of PED The more substitutes a good has, the more elastic demand is AND the closer the substitute is, the more elastic demand will be.

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9

degree of necessity (PED)

determinant of PED if a good is a need, then most/many consumers will continue to purchase the good even if prices go up could be addictive substances

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10

proportion of income spent (PED)

determinant of PED the larger the portion of your income you spend on a good, the more elastic demand will be luxury goods are very elastic if a good or service that is a small portion of your income increases in price you will hardly notice

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11

time (PED)

determinant of PED the longer a consumer takes in making a purchase, the more elastic demand will be

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12

income elasticity of demand (YED)

measure of the responsiveness of demand to a change in incomes

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13

YED formula

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14

Positive YED

it is a normal good demand will increase as income increases

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15

income-inelastic demand

IF YED IS BETWEEN 0 AND 1 good is a necessity demand will change very little

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16

income-elastic demand

IF YED IS GREATER THAN 1 good is a luxury or service demand will rise noticeably if incomes rise

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17

inferior good

IF YED IS NEGATIVE demand decreases as incomes increase demand will increase as incomes decrease

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18

Engel Curve

shows the relationship between demand and income over time

<p>shows the relationship between demand and income over time</p>
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19

price elasticity of supply (PES)

measure of how much supply will change if prices change

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20

PES formula

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21

perfectly inelastic supply

IF PES IS ZERO change in price will have no effect on supply

<p>IF PES IS ZERO change in price will have no effect on supply</p>
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22

inelastic supply

IF PES IS BETWEEN 0 AND 1 change in the price of a product leads to less change in supply

<p>IF PES IS BETWEEN 0 AND 1 change in the price of a product leads to less change in supply</p>
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23

elastic supply

IF PES IS GREATER THAN 1 change in price will lead to a larger increase in supply

<p>IF PES IS GREATER THAN 1 change in price will lead to a larger increase in supply</p>
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24

perfectly elastic supply

IF PES IS INFINITY any change in price will result in no supply like wheat or other commodities on the world market

<p>IF PES IS INFINITY any change in price will result in no supply like wheat or other commodities on the world market</p>
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25

determinants of PES

T- time R- rate of cost increase U- unused capacity M- mobility of factors of production A- ability to store

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26

time (PES)

determinant of PES it takes time to reallocate resources and increase supply over time, if there has been an increase in prices supply will become more elastic

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27

mobility of factors of production (PES)

determinant of PES the easier it is to change from one line of production to another, the more responsive supply is to a change in price manufactured goods are more elastic than agricultural products primary commodities and heavy industrial goods are inelastic supply

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28

unused capacity (PES)

determinant of PES if a firm can increase production without having to expand its plant size and capital then they can quickly increase supply

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29

ability to store (PES)

determinant of PES if a firm can store their goods when demand is low, then they could bring them out of storage when demand increases if the good is perishable then firms cannot keep it in stock and increase supply when demand shifts

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30

rate at which costs increase (PES)

determinant of PES if the costs of increasing production are high, supply will be inelastic if the costs of increasing production are low, supply will be elastic

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31

PES for manufactured goods

PES values for manufactured goods are generally higher than for commodities machinery often can be repurposed to respond to a change in demand

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32

PES for primary commodities

all natural resources PES values are very low it takes months, if not years to change supply land and resources are limited environmental destruction, global warming further limits commodities

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33

Sectors of the economy

primary, secondary, tertiary

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34

primary sector

commodities/natural resources YED values tend to be greater than 1

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35

secondary sector

manufactured goods YED values tend to be greater than 1

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36

tertiary sector

services YED values tend to be less than 1

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37

developing countries

rely primarily on its primary sector low PES values make it hard to increase output when prices rise low YED values mean that as incomes rise, developing countries do not benefit greatly

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38

developed countries

large tertiary sector benefit as incomes rise in the world hurt the most when there is a recession

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39

importance of YED for firms

firms benefit from knowing if they will thrive or struggle in a recession or during economic growth

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