economic price elasticity demand and supply

Price Elasticity of Demand (PED)

Measures the responsiveness of the quantity demanded of a good to a change in its price.

Formula for PED

PED = rac{ ext{ ext{% change in quantity demanded}}}{ ext{ ext{% change in price}}}

Price Elastic

When PED > 1, consumers are very sensitive to price changes.

Price Inelastic

When 0 < PED < 1, consumers are not very responsive to price changes.

Unitary Elastic

When $PED = 1$, the percentage change in quantity demanded is exactly equal to the percentage change in price.

Determinant of PED: Availability of Substitutes

More substitutes make demand more elastic.

Determinant of PED: Degree of Necessity

Necessities are inelastic; luxuries are elastic.

Determinant of PED: Proportion of Income Spent

Cheap items tend to be inelastic.

Determinant of PED: Time Period

Demand becomes more elastic over time.

Price Elasticity of Supply (PES)

Measures the responsiveness of the quantity supplied of a good to a change in its price.

Formula for PES

PES = rac{ ext{ ext{% change in quantity supplied}}}{ ext{ ext{% change in price}}}

Price Elastic (PES)

When PES > 1, firms can easily increase production if prices rise.

Price Inelastic (PES)

When 0 < PES < 1, firms find it difficult to change production levels quickly.

Determinant of PES: Time Period

Supply is inelastic in the short run but more elastic in the long run.

Determinant of PES: Availability of Stocks

High stock levels make supply more elastic.

Determinant of PES: Spare Capacity

If a factory isn't running at full capacity, it can quickly increase supply.

Determinant of PES: Mobility of Factors of Production

If resources can easily switch tasks, supply is more elastic.

Importance of PED for Businesses

Helps in setting prices to maximize Total Revenue.

Importance of PED for Governments

They tax goods with inelastic demand to ensure high tax revenue.