Economics Elasticity

Price Elasticity of Demand

The responsiveness of quantity demanded to a change in price of a product. It is a measure of how sensitive buyers are to a change in price.

PED = 0

- Perfectly INELASTIC

- Change in P will not change Qd

- Usually necessary for survival

PED < 1

- Relatively INELASTIC

- If P⬆️ by 1% Qd will ⬇️ by <1%

- Less sensitive to change in P

PED = 1

- Unitary ELASTIC

- The same change will occur on both axis

PED > 1

- Relatively ELASTIC

- If ⬆️ in P by 1% Qd will ⬇️ by > 1%

- More sensitive to ⬆️ in P

PED = Infinity

- Perfectly ELASTIC

- Any ⬆️ in P consumers will stop buying

- Usually goods with perfect substitues

Determinants of PED

- Availability of substitutes

- Proportion of income spent

- Necessity or luxury?

- Time

- Definition of a market

PED Determinant - Availability of Substitutes

- The greater teh substitute the more elastic

- Demand for good that have few substitutes are inelastic

- More sensitive to change in price (can switch to other products)

PED Determinant - Proportion of income spent

- Little of our income = more inelastic

- Lots of income = more elastic

PED Determinant - Necessity or Luxury?

- If necessity = inelastic

- If luxury = more elastic

PED Determinant - Time

- How long consumers have to shop around / delay purchase

- More time = more elastic

PED Determinant - Definition of a Market

- Broadly defined market = more inelastic

- Narrowly defined market = more elastic

TR: P⬆️ - ELASTIC

⬆️ in P = ⬇️ in TR

- P and TR move in opposite directions

TR: P⬇️ - ELASTIC

⬇️ in P = ⬆️ in TR

TR: P⬆️ - INELASTIC

⬆️ in P = ⬆️ in TR

TR: P⬇️ - INELASTIC

⬇️ in P = ⬇️ in TR

Price Elasticity of Supply

A measure of the responsiveness of quantity supplied of a good to a change in the price of that good.

PES = 0

- Perfectly INELASTIC

- A change in P will not change Qs

PES < 1

- Relatively INELASTIC

- A ⬆️ in P of 1% will result in < 1% ⬆️ in Qs

PES = 1

- Unitary ELASTIC

- P change = Qs change

PES > 1

- Relatively ELASTIC

- a ⬆️ in P of 1% will result in > 1% change is Qs

PES = Infinity

- Perfectly ELASTIC

- Eg. minimum wage

Price ELASTIC goods in SUPPLY

Sellers can easily and quickly expand supply in response to a change in P. Eg. manufactured goods

Price INELASTIC goods in SUPPLY

Sellers can not quickly and easily expand supply. Eg. Agricultural goods

Determinants of PES

- Time

- Ability to store inventory

- Nature of industry

PES Determinant - Time

- If producers can respond quickly to change in P, elastic

- If goods take a long time to produce, inelastic

PES Determinant - Ability to store inventory

- Goods that can be stored are more elastic than perishable goods

- Producers of storable goods can be flexible with their supply

PES Determinant - Nature of industry

- Agricultural goods are inelastic, manufactured is elastic

- Farmers need to wait until next growing season, manufactured goods supply can be easily adjusted depending on the market