Elasticity

Price Elasticity of Demand (PED)

Measure of how much the quantity demanded of a product changes when there is a change in the price of the product

Cross Elasticity of Demand (XED)

Measure of how much quantity demanded change when price of another product change

Range values for XED

  1. Negative value = the 2 goods are complements

Determinants of PED

  1. Zero = the 2 goods are unrelated

• Number of closeness and substitute – More substitute, PED becomes higher

• Degree of necessity – The lower the degree of necessity, the higher the value of PED

• Time period – Inelastic in the short term, elastic in the long term

• Income – The higher the income, the higher the PED as people will look for a better quality of product

  1. Positive value = the 2 goods are substitutes

Price Elasticity of Supply (PES)

Measure of how much supply of a product change when price of product change

• PED = 0 (Perfectly inelastic)

• 0 < PED < 1 (Inelastic demand – Necessity goods)

• 1 < PED < ∞ (Elastic demand – Normal goods)

• PED = 1 (Unit elastic demand - % change in demand = % change in price)

• PED = ∞ (Perfectly elastic demand)

Determinants of PES

Existence of unused capacity : More unused capacity,able to increase output easily without great cost,higher PES

Income Elasticity of Demand (YED)

Mobility of factors of production : Factors of production easily moved,less cost of production,higher PES

Measure of how much the demand for a product changes when there is a change in the consumer's income

Determinants of YED

Time period : The longer the time period,higher PES

Ability to store stock : Able to release high levels of stock,able to react to price increases,higher PES

• Normal goods – YED is positive. Demand increases as income increases.

• Inferior goods – YED is negative. Demand decreases as income increases.

• Necessities – Low income elasticity. Demand for them will change very little if income rises.

• Superior – High income elasticity. Demand for them changes significantly if income rises.

Range values for PES

PES > 1 = supply is elastic,producers can increase output without a rise in cost

PES < 1 = supply is inelastic,producers find it hard to change production in given time period

Formula = (%∆ in Q DD) / (%∆ Y)

Formula = (%∆ in Q DD of Product A) / (%∆ in P of Product B)

Formula = (%∆ in Q SS) / (%∆ P)

Formula = (%∆ in Q DD) / (%∆ P)