Price Elasticity

What is elasticity in economics?

How responsive demand or supply is to changes in factors such as price or demand

What is PED and how is it calculated?

Price Elasticity of Demand:

% change in quantity demanded / % change in price

What do elastic, inelastic, and unitary PED mean?

Elastic: PED > 1

Inelastic: PED < 1

Unitary: PED = 1

2 examples of elastic and inelastic demand

Elastic: Luxury goods, restaurant meals

Inelastic: Petrol, salt

What four factors affect PED?

Availability of substitutes

Proportion of income spent

Necessity vs luxury

Time to adjust

What is PES and how is it calculated?

Price Elasticity of Supply:

% change in quantity supplied / % change in price

What is the difference between elastic and inelastic supply?

Elastic (PES > 1): Output responds strongly to price

Inelastic (PES < 1): Output responds less

What 4 factors affect PES?

Spare production capacity

Availability of raw materials

Production time

Stock levels

Why does supply tend to become more elastic over time?

Firms have more time to expand capacity, obtain resources, and increase production

What is YED and how is it calculated?

Income Elasticity of Demand:

% change in quantity demanded / % change in income

What do positive, negative, and high positive YED indicate?

Positive: Normal goods

Negative: Inferior goods

High positive (>1): Luxury goods

What is XED and how is it calculated?

Cross Elasticity of Demand:

% change in demand for good A / % change in price of good B

What do positive, negative, and zero XED indicate?

Positive: Substitutes (Coke/Pepsi)

Negative: Complements (printers/ink)

Zero: Unrelated goods

How can businesses use PED to increase total revenue?

Raise prices when demand is inelastic; lower prices when demand is elastic

How do governments use elasticity?

To predict effects of taxes and subsidies.

Taxing inelastic goods (petrol) can raise stable revenue