Price Elasticity of Demand and Supply

Price Elasticity of Demand

(%Δq.d)/(%Δp)

What is meant by a PED of x

(In)elastic Demand, a 1% increase in price will lead to a x% decrease in quantity demanded.

Elastic Demand

A percentage change in price will lead to a greater percentage change in q.d and PED for demand is more than 1.

Inelastic Demand

A percentage change in price will lead to a smaller percentage change in q.d and PED for demand is less than 1.

Perfectly Inelastic Demand

A percentage change in price will lead to no effect on quantity demanded, PED is 0

Perfectly Elastic Demand

A percentage change in price will lead to a infinite change in quantity demanded, PED is infinite

Unitary Demand

A percentage change in price will lead to the same percentage change in q.d, PED = 1

Revenue

Price x q.d/ q traded/q.s

Profit

Revenue - Cost of Production

Consumer Expenditure

Sales Revenue

In Elastic PED should how can they increase revenue?

Decrease Price

In inelastic PED how can they increase revenue

Increase Price

Determinants of PED (5)

Availability of Substitutes

Whether product is luxury or necessity

Proportion of income spent on Product

Time Period

Addictive / habit buying

Availability of Substitutes

Consumers can switch to the cheaper alternative of the product

Proportion of Income spent on Product

Is price is a large proportion of income, consumers will notice the rise in price more.

Period of time

If consumers have a long period of time to adjust their demand, it will be easier to postpone buying the product

Necessity or Luxury

If people need it it will be inelastic demand

Addictive/ Habit buy

People less willing to alter demand

Any question relating the price elasticity of demand and a business

Price Elasticity definition

Helps firms decide Pricing strategy

2 types of PED

Elastic Demand def + examples + how to increase revenue

Inelastic Demand def + + example + how to increase revenue

How PED changes along a straight line demand curve

Price Elasticity of Supply

(%Δq.s)/(%Δp)

What is meant by a PES of x

(In)elastic supply, a 1% increase in price will lead to a x% increase in quantity demanded.

Elastic Supply

A percentage change in price will lead to a greater percentage change in q.s and PES is more than 1.

Inelastic Supply

A percentage change in price will lead to a smaller percentage change in q.s and PES is less than 1.

Perfectly Inelastic Supply

A percentage increase in price will lead to no percentage increase in q.s, PES = 0

Perfectly Elastic Supply

A percentage increase in price will lead to an infinite percentage increase in q.s, PES = infinite

Unit PES

PES= 1, a percentage increase in price leads to the same percentage change in q.s

PES determinants (4)

The time it takes to produce the product

Degree of spare productive capacity

Product that can be stored

Level of Stocks

Production period in PES

If it is decreased it will make it easier to alter the quantity produced- elastic supply

Product Storage PES

If it has longer storage, it would be easier to bring more products onto the market or withdraw them from the market- elastic supply

Level of stocks PES

Amount of finished goods or inventory ready for sale, if it is more then more elastic PES as production can be adjusted without increasing costs.

Degree of spare productive capacity PES

If there is plenty of spare productive capacity, supply can be increased without increasing cost - elastic supply.