ECON PED, YED, SED

Elasticity

Elasticity

A measure of the responsiveness of an economic variable (such as the quantity demanded of a good or service) to a change in another economic variable (such as its price or income).

Luxury goods

A superior type of Normal Goods which which lower quality and cheaper alternatives exist. They have a price elastic demand (PED > 1), or income elastic demand (YED > 1). For example, as consumers incomes decrease the quantity demanded for the luxury good will fall significantly.

Necessity

• Necessities are essential products that consumers buy in order to meet their needs. They have a positive YED value that is less than 1. that is, the proportionate change in quantity demanded is less than the proportionate change in real incomes.

Perfectly elastic demand

Occurs along a horizontal demand curve signifying that any quantity can be bought at only one particular price. (PED is infinite.) Buyers are only able and willing to buy at that particular price.

Perfectly inelastic demand

Where a change in the price of a good or service leads to no change in the quantity demanded of the good or service. (PED is equal to zero.) This is illustrated along a vertical demand curve.

(Price) elastic demand

Where a change in the price of a good or service leads to a proportionately larger change in the quantity demanded of the good or service in the opposite direction. PED is greater than one: % change of price < % change of quantity demanded

Price elasticity of demand (PED)

A measure of the responsiveness of the quantity demanded of a good or service to a 1% change in its price.

(Price) inelastic demand

Where a change in the price of a good or service leads to a proportionately smaller change in the quantity demanded of the good or service in the opposite direction. PED is less than one and % change of price > % change of quantity demanded

Revenues

Payments received by firms when they sell their output.

Price per unit x quantity (sold)

Engel curve

And Engle curve is a graphic illistraion demonstrating the relationship between income and the quantity demanded. Normal goods (services and luxuries) have a positive slope, whereas inferior goods have a negative slope along an Engel curve.

Income elasticity of demand (YED)

The responsiveness of demand for a good or service to a change in income of buyers increases by one percent.

Normal goods

A good where the demand for it increases as income increases.

Inferior goods

Lower quality goods for which higher quality substitutes exist; if incomes rise, demand for the lower quality goods decreases. A a negative income elasticity of demand. In other words, the demand for such products tends to tall when consumers real incomes rise.

Real income

The total value of all final goods and services produced in an economy in a given time period, usually one year, adjusted for inflation.

Income

A flow of earnings from using factors of production to produce goods and services.

Wages and salaries are the factor reward to labour and interest is the flow of income for the ownership of capital.

Determinants of PED

Substitutes (number and similarity)

Habits (necessity/ addictiveness)

Income (how willing)

Time (People need time to change habits)

• Necessities

• Necessities are essential products that consumers buy in order to meet their needs.

They have a positive YED value that is less than 1, that is, the proportionate change in quantity

demanded is less than the proportionate change in real incomes.

Price elasticity of supply (PES)

Measures the degree of responsiveness of quantity supplied of good/service due to a 1 % change in its price.

• Price elastic supply

• occurs when a change in the price of a good or service leads to a proportionately larger change in the quantity supplied of the good or service. Supply is highly responsive to the change in price. The value of PEs is greater than one.

• Price inelastic Supply

When a change in the price of a good or service leads to a smaller proportionately change in the quantity supplied, i.e. supply is relatively unresponsive to the change in price. The value of PES is less than one.

• Unitary price elastic supply

• refers to a theoretical situation When the value of PES = 1, that is, the percentage change in quantity supplied is equal to the percentage change in the price of the product.

Perfectly price elastic supply

If PES - ∞ (infinity) then supply is perfectly price elastic. In other words, the quantity supplied can change without any corresponding change in price owing to the spare capacity that exists at the current price level. P.. For example, Berkshire Hathaway might have a huge stock of Duracell batteries, so any increase in demand will simply result in the company mass producing more Duracell batteries, without the price having to be raised.

Perfectly Price inelastic supply

If PES=0, A change in price has not impact of the quantity supplied as there is no spare capacity to raise output. For example tickets at a football stadium, which Qd can’t exceed maximum capacity.

Determinants of PES

Time: PES is inelastic short term as firms don’t nessisarly have the resurfaces to suddenly increase output.

Mobility of FOPS: The level of ease and cost of factor subisituion such as labour for capital, the greater the mobility the more price elastic supply is. For example publishers can use machinery to switch from, graphic novels, to books, to magazines.

Unused Capacity: The degree of spare productive capacity. A firm with spare unused capacity and access to raw material and components supply is relativly elastic.

Ability to Store: The level of stock/ inventory held by the firm. Firms with higher inventory tend to have relatively price elastic supply. Canned goods are more supply elastic than produce.

Marginal Cost: The additional costs associated with one extra unit of output. If magical costs are high supply is relatively price inelastic. For example producing a niche luxury sports car has a high marginal cost and their fore is relatively price inelastic.

Perfectly price inelastic demand

When the value of PED is zero, demand is perfectly price inelastic.In other words, a change in price has no impact on the quantity demanded. This theoretical extreme suggests that there are no substitutes for the product. In reality, demand will not exist irrespective of all price levels, but the demand for prescription drugs, anti-venom, clean water or veterinary services would be close to being perfectly price inelastic. I on graph.

Unit elastic demand

When the PED value = 1.0, demand is said to be of unit elastic demand.

This occurs when a given price change of a product leads to the same percentage change in the quantity demanded.

This means that total spending by customers on the product will remain the same, at all given prices.

Pertectly price elastic demand

If PED = ∞ (infinity) then demand is perfectly price elastic. In other words, demand exists at one price only, and any change in price leads to zero demand. This theoretical extreme suggests that customers will switch to buying other substitutes that are readily available if firms increase their price. This hypothetical situation exists only it there are perlect substitutes readily available on the market that customers can easily access. E on graph.