Elasticities

Price Elasticity of Demand (PED)

a measure of the responsiveness of demand after a change in price

Equation for PED

-PED=(%ΔQd)/(%ΔP)

-PED=(ΔQ/Q)x(P/ΔP)

Availability of Substitutes

the amount of products that can be purchased instead. If more substitutes are available, demand will be more elastic. e.g. elastic - bananas, inelastic - petrol

Proportion of Income

how much of a consumer's income is spent on the product. If more income is used, demand will be elastic. e.g. elastic - new car, inelastic - coffee

Degree of Necessity

refers to how essential a product is. If product is more necessary, demand will be more inelastic. e.g. elastic - champagne, inelastic - bread

Time (PED)

How long a consumer has to respond to the change in price. If there is more time, demand will be more elastic. e.g. petrol will be inelastic in the short-term but elastic in the long-term.

Definition of Market

whether a broad market is being referred to or a certain brand/product. The more specific the market is, the more elastic demand will be. e.g. inelastic - chocolate, elastic - lindt chocolate

Total Revenue (TR)

the amount of money sellers receive at different prices (PxQ)

Link Between PED and TR

-elastic demand: increase in price = decrease in TR

-inelastic demand: increase in = increase in TR

-unitary demand: change in price = no change in TR

Price Elasticity of Supply (PES)

a measure of the relationship between change in quantity supplied following a change in price

Equation for PES

-PES=(%ΔQs)/(%ΔP)

-PES=(ΔQs/Q)x(P/ΔP)

Spare Capacity

how much spare production space a producer has. if there is more spare capacity, supply will be more elastic. e.g. a restaurant has spare capacity during quiet hours, meaning they have elastic supply, compared to the busiest part of the day where they have no spare capacity and supply is inelastic.

Ability to Store Stock/Inventory

how much stock producers are able to store. If suppliers can store more, supply will be more elastic. e.g. a mechanic that stores lots of parts will have elastic supply, farmers will have inelastic supply as they cannot store fresh produce for very long.

Time (PES)

How long suppliers have to respond to changes in price. If producers have more time, supply will be more elastic. e.g. a restaurant will have inelastic supply in the short-term but elastic supply in the long-term.

Factor Substitution

how easily factors of production can be substituted. If factors are easily substituted then supply will be more elastic. e.g. a printer can switch from printing magazines to greeting cards meaning it has elastic supply, but a teacher does not have the same skills as a doctor meaning labour supply is inelastic.

Production Process

how long the production process takes. If production takes longer, supply will be more inelastic. e.g. farmers cannot immediately grow more potatoes meaning they have inelastic supply, compares to a pizza shop that can quickly make and deliver pizzas and supply is elastic.

Price Discrimination

The manipulation of price for different consumers based their elasticities to increase total revenue.

Incidence of Tax

how the burden of tax is distributed between producers and consumers. for inelastic goods consumers pay most of the tax, for elastic goods producers pay most of the tax.