Please enable JavaScript.
Coggle requires JavaScript to display documents.
Price Elasticity (Demand : measures the degree of responsiveness of the…
Price Elasticity
Demand : measures the degree of responsiveness of the quality demanded of a good to a change in its own price, ceteris paribus
-
Determinants of PED
Number of substitutes 1)The PED of a good will be higher the larger the number of substitutes and vice versa
-
-
Time Period 1) The demand for most goods and services is price-inelastic in the short run as consumers take a longer time to adjust their tastes and preferences to find suitable alternatives. 2) The longer the time period, the more price-elastic the demand
Proportion of income spent on the good 1) The higher the proportion of income spent on a good, the more price elastic the demand is. 2) Consumers have no difficulty in paying for goods that occupy a lower proportion of their income in the event that the price changes
-
:star: sign is negative because Law of Demand indicates an inverse relationship between changes in price and quantity demanded.
Supply : measures the degree of responsiveness of the quantity supplied of a good to a change in its own price, ceteris paribus.
Determinants of PES
Production Time and Stockability of the good 1)The shorter the production time, the more price elastic the supply of the good. 2) If unsold stocks can be easily stocked, firms will be able to meet the increase or decrease in demand for its good. Supply is more price elastic.
Excess Capacity 1) If excess capacity is available, it is possible to increase production levels in the short run. 2) Supply is more price elastic with spare capacity
Definition of the good 1) The more broadly a good is defined, the less price elastic the supply and vice versa. :warning: The supply of a crop is more price elastic than the supply of crops as a whole as it is easier to obtain factor inputs within the agricultural sector to produce a crop than to obtain factor inputs from other industries to produce crops as a whole.
TIme Period 1) Supply is price inelastic in the short run for most goods. However, in the long run, with more stocks, with more stocks and mobility of the resources, supply becomes more price elastic in the long run.
Mobility of factors of production 1)If the factors of production can be easily substituted, supply is more price elastic.
-
Magnitude ranges from 0 to infinity,
PES > 1 1) Supply is price elastic. 2)When demand increases, price increases less than proportionately while output increases significantly.
0<PES<1 1) Supply is price inelastic. 2) When demand increases, price increases significantly while output increases less than proportionaltely