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Elasticity (PED (the determinants of PED (number and closeness of…
Elasticity
PED
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perfectly elastic demand, perfectly inelastic demand, unit elastic demand
the determinants of PED
number and closeness of substitutes:
the more close substitutes a good has, the more elastic its demand
proportion of income spend on the good:
the greater the proportion of income spent on a good, the more elastic its demand
degree of necessity:
the more necessary a good, the less elastic its demand
time:
the more time a consumer has available to make a decision to buy a good, the more elastic the demand
Applications of PED
application1: PED and total revenue
PED in relation to TR: when PED=1, TR is at maximum
application2: PED for primary commodities and manufactured products
most primary commodities have a low PED because they do not have close substitutes and they are necessities; manufactured products usually have a higher PED
application3: PED and indirect taxes
the lower the PED, the more inelastic the D, the greater the government revenue
application4: PED and tax incidence
if PED< PES the incidence of the tax is greater on consumers than on producers; if PED> PES the incidence of the ta is greater on producers
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PES
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determinants of PES
time:
the longer the time period a producer has to respond to price changes, the more elastic the supply.
unused capacity of firms:
if firms have machines, equipment, or labor that are not being fully used, then it is easier to expand production in the event that price increases, simply by making use of the idle resources, and therefore the more elastic the supply
mobility of factors of production:
the more quickly and easily necessary resources can be moved from one type of production to another where they are needed, the more elastic the supply
ability to store stocks:
if a firm can store stocks easily and inexpensively, then in the event of a price increase it is more likely to have available stock can be sold in the market, and the more elastic the supply
Applications of PES
application1: PES for primary commodities and manufactured products
most primary commodities have a lower PES than manufactured goods because they need more time
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XED
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- XED=0 means the two goods have no relation
- XED>0 means X and Y are substitutes--Qx and Py * change in the same direction
- XED<0 means X and Y are complements-- Qx and Py change in opposite directions