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Elasticities (Price elasticity of demand (Determinants of price elasticity…
Elasticities
Price elasticity of demand
Measure of how much quantity demanded of a product changes when there is a change in price
percentage change in quantity demanded/percentage change in price of the product
0<PED<1 --> inelastic
If inelastic demand firms should raise price to gain more profit
1<PED --> elastic
If elastic demand firms should lower price to gain more profit
Unit elastic demand: PED = 1
Determinants of price elasticity of demand
The number and closeness of substitues
The necessity of the product and how widely it is defined
The time period considered
Cross elasticity of demand
percentage change in quantity demanded of product X/percentage change in price of product Y
measure of how much the demand for a product changes when there is a change in the price of another product
XED = Positive --> substitues
XED = Negative --> complements
The higher the XED the closer the goods are
Unrelated Goods --> XED = 0
Income elasticity of demand
Percentage change in quantity demanded of the product/Percentage change in income of consumer
How much the demand for a product changes when there is a change in the income of the consumer
Positive YED = Normal good
Negative YED = Inferior good
Higher YED = Luxury good --> high income elasticity
Necessities have low income elasticity
Price elasticity of supply
Measure of how much the supply of a product changes when there is a change in the price of the product
Percentage change in quantity supplied of the product/Percentage change in price of the product
0<PED<1 --> inelastic
Determinants of price elasticity of supply
The time period considered
The ability to store stock
How much costs rise as output is increased
1<PED --> elastic e.g. wheat...
Primary Commodities
Demand for primary (necessities) is inelastic
Demand for manufacture good = more elastic
Supply for primary is inelastic
Supply for manufactured goods = more elastic