Elasticity

PED

measure me responsiveness of quantity demanded of a product to a change in its price

PED formula

% change in qd/% change in price

Price elastic

Consumers very price sensitive
More than proportionate change in quantity demanded
PED >1 or

Price inelastic

Not very sensitive to price change
Less than proportionate change in quantity demanded
PED = -1 to 1

Price unitary

PED = 1 or -1

PED determinants

Proportion of income
Addictiveness
Necessity
Time
Substitutes

Proportion of income

• If price is low proportion of income then PED inelastic- therefore, consumers are not sensitive to price changes
E.g. salt
• If price is high proportion of income then PED is elastic - consumer sensitive to price changes

Addictiveness

• If you are addicted to something then you will be PED inelastic - because you want that item that you are addicted to regardless of cost
E.g. cigarettes

Necessity

If something is a necessity the. It is PED inelastic - because consumers need that item regardless of its cost

Time

If they have time to shop around

Substitutes

Are there alternatives

As price increases

Price inelastic goods suppliers = increased revenue
Price elastic goods = decreased revenue

PES

Measure of the responsiveness of quantity supplies to change in price

PES formula

%change in qs/%change in price

Price increase PES

Extension in supply

Price decrease PES

Contraction in supply

Price elastic PES

Very responsive to changes
Change in price leads to more than proportionate change in quantity supplied

Price inelastic PES

Note very responsive to price changes
Change in price leads to less than proportionate change in quantity supplied

Price unitary PES

Change in price leads to same %change in quantity supplied
Change in price leads to proportionate change in supply

PES factors

Spare capacity
Time period
Availability of stock
Range of products

Spare capacity

If a business lacks spare capacity producers are less able to increase the quantity supplied where there is an increase in price
PES likely to be inelastic

Time period

If it takes a long time to produce then it's more difficult to increase supply when there is an increase in price
Price inelastic

Availability of stock

If lacking in stock of the final consumer product then it is difficult to increase supply when price increase
Therefore, price inelastic

Range of products

If a producer has a wide range of product that they sell, then when the price of one food increase they are able to increase supply by switching factors of production away from other goods in response to change in price
Therefore price elastic