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Elasticity (Price Elasticity of Supply (PES) (Determinants of PES…
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
Determinants of PED
•
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
•
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)
Formula
= (%∆ in Q DD) / (%∆ P)
Cross Elasticity of Demand (XED)
Measure of how much quantity demanded change when price of another product change
Range values for XED
Negative value
= the 2 goods are complements
Zero
= the 2 goods are unrelated
Positive value
= the 2 goods are substitutes
Formula
= (%∆ in Q DD of Product A) / (%∆ in P of Product B)
Price Elasticity of Supply (PES)
Measure of how much supply of a product change when price of product change
Determinants of PES
Existence of unused capacity
: More unused capacity,able to increase output easily without great cost,higher PES
Mobility of factors of production
: Factors of production easily moved,less cost of production,higher PES
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
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 SS) / (%∆ P)
Income Elasticity of Demand (YED)
Measure of how much the demand for a product changes when there is a change in the consumer's income
Determinants of YED
•
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.
Formula
= (%∆ in Q DD) / (%∆ Y)