Elasticity

2.5 Elasticity of Demand

Defining Elasticity

  • Elasticity: Measure of responsiveness related to change in determinants.

  • Price Elasticity of Demand (PED): Reflects quantity demanded adjustments per price change percentage.

Types of Demand Elasticity

  1. Inelastic Demand:

    • Quantity demanded responds less to price changes.

    • Example goods: necessities like gasoline or milk.

    • Few substitutes and necessity characteristics define.

  2. Elastic Demand:

    • Quantity demanded responds significantly to price changes.

    • Examples: luxury goods, non-essential items with many substitutes.

  3. Unit Elastic Demand:

    • Equal proportional change in price and quantity demanded.

    • Example: 5% price increase correlates with 5% quantity decrease.

Computing PED

  • Formula:

    • PED = rac{ ext{% Change in Quantity Demanded}}{ ext{% Change in Price}}

  • Interpreting Results:

    • Elasticity values guide revenue implications and business strategies.

2.6 Elasticity of Supply

Price Elasticity of Supply (PES)

  • Definition: Responsiveness of suppliers to price changes.

  • Inelastic vs Elastic Supply: Time is determinant; generally greater elasticity in the long run.

Determinants of PES

  1. Spare Capacity: More unused capacity implies elasticity.

  2. Mobility of Factors of Production: Flexibility enhances responsiveness.

  3. Storage Ability: Perishability affects supply approach.

  4. Rate of Cost Increase: Impacts decision-making for producers.

Example of PES Application

  • Practical illustrations from industries, tracking responsiveness in varied economic landscapes.