eco - PED, YED, XED, PES

what does PED stand for

price elasticity of demand

what is the definition of PED (price elasticity of demand)

measures the responsiveness of changes in quantity demanded of a product to a change in its price

what is the formula for PED (price elasticity of demand)

PED. = % change in qty demanded / %change in price

what is the relationship between qty demanded and price

negative - so we always put a (-) in front of our answer to elasticity

what are the different types of elasticity

1) elastic demand

2) inelastic demand

3) unitary elastic

4) perfectly inelastic

5) perfectly elastic

what is elastic demand

if the number is more than 1

e/g) 40/25 =. (-) 1.6

what is inelastic demand

if the answer is less than 1

e.g) 5/10 = (-) 0.5

what is unitary elastic

when it equals exactly 1

e.g) 50/50 = (-) 1

what are some factors affecting PED

range and attractiveness of substitutes

the addictive properties

the relative expense of the product

time

how does range and attractiveness of substitutes affect PED

the more substitutes avaliable means the more likely the consumer will switch away from that product to a new one

if consumers have acess to info about substitutes the more easier it is for them to switch

how does the addictive properties affect PED

how strong the brand image is

how does the relative expense of the product affect PED

a rise in the price of a product leaves a consumer with less money in the pocket and the consumers real income has decreased

how does time affect PED

in the short run people are unaware of price rises so they dont change their spending patterns so PED remains inelastic

but in the long run with more info avaliable they will switch to other products - PED is elastic

what does PED help us understand

the total expenditure by consumers will change as prices rise and fall

what is the formula for expenditure

expenditure = price x quantity

what is PES

price elasticity of supply

what is the definition of PES

the responsiveness of a quantity supplied to a change in price

what is the formula for PES

%change in qty supplied / %change in price

how relationship does price and qty supplied have

positive

what are some factors affecting PES

time: it takes time to increase supply in the short run it may not be possible to increase supply of books bc it takes time to print - this can only happen in the longrun

the cost of increasing supply: the less costly it is to increase supply the more elastic it becomes

what can PES help us understand

the speed and ease with which firms can respond to changing market conditions

PES for agricultural goods are more inelastic than for manufactured goods.

what does YED stand for

income elasticity of demand

what is YED

the numerical measure of the responsivness of demand to a change in income alone

is demand is responsive is it elastic or inelastic

elastic

if demand is unresponsive is it elastic or inelastic

inelastic

what is the formula for YED

%change in Qty Demanded / %change in income

if the answer to YED is between 0-1 what is it

a normal good

if the answer to YED is more than 1 what is it

luxury good

what does YED provide us with

provides us with info about how demand varies as income changes which is important for planners within businesses and govt

what does XED stand for?

cross elasticity of demand

what is the definition of XED

the numerical measure of the responsiveness of the demand for one product following a change in the price of a related product

what is the formula for XED

%change in Qty demanded for product A or B/ %change in price of product A or B

what would an inelastic good need to do in order to increase revenue

they would need to reduce price , as qty demand increases by a larger percentage according to the formula

what would an elastic good need to do in order to increase revenue

they would need to increase price

which has more scope to raise prices, inelastic or elastic and why

inelastic has more scope to raise prices, Because when demand is inelastic, consumers are less responsive to price increases, so quantity demanded falls by a smaller percentage.

what is an example of an inelastic good and why it has scope to raise prices

petrol - its a necessity and doesn’t have many substitutes so people are forced to deal with the price changes

what do firms gain from knowing they PED

• Predict how demand will respond to a price change

• Decide whether to raise or lower its price

• Predict the effect on total revenue

• Set a price that helps maximise revenue

• Understand how sensitive its customers are to price

why is knowing a firms PED sometimes not helpful?

• PED can change over time
  Consumers' behaviour can change, so a PED calculated from past data may not apply in the future.

• Other factors affect demand
  Income, tastes, advertising, competitors' prices and expectations can all change demand — not just the firm's price.

• It may be inaccurate
  Firms may not have enough reliable data to calculate PED accurately.

what does PES tell us?

PES tells you how easily the firm can change the amount it supplies when the price changes.

if PES is elastic what does it mean

Elastic PES → firm can increase supply easily → can sell more at the higher price → potentially increase revenue significantly.

if PES is inelastic what does it mean

Inelastic PES → firm cannot easily increase supply → may miss out on potential revenue from the higher price

does inelastic or elastic PES have more scope to raise supply when price rises

Elastic PES → more scope to increase supply/output when prices rise.

when is firms knowing their PES helpful?

• Predict how much they can increase output when prices rise.

• Plan production and allocate resources.

• Respond to changes in market demand.

• Take advantage of higher prices by increasing supply.

• Understand their production limitations, especially in the short run.

when is firms knowing their PES not helpful

• Limited capacity → firms may not have enough machinery, factories or workers to increase output quickly.

• Production takes time → some goods take a long time to produce, so supply cannot respond immediately.

• Perishable goods → goods such as fruit, vegetables and milk cannot be stored for long, so firms cannot hold stock and release it when prices rise.

• Labour shortages → firms may struggle to find enough workers to increase production.

• Limited raw materials → shortages of resources can prevent firms from increasing supply.

• PES can change over time → changes in technology, capacity and resources can make previous estimates inaccurate.

• It is only an estimate → actual supply may differ from what the calculated PES predicts.

when income is elastic what happens to demand

Income elastic (YED > 1) = demand is very responsive to income changes.

Elastic = very responsive

when income is inelastic what happens to demand

ncome inelastic (0 < YED < 1) = demand is less responsive to income changes.

Inelastic = not very responsive