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CH 2B: Resources allocation: elasticities of demand and supply - Coggle…
CH 2B: Resources allocation:
elasticities of demand and supply
1. Price Elasticity of Demand
definition:
PED measures the degree of responsiveness of the quantity demanded of a good to a change in its price
calculation:
PED = percentage change in quantity demanded / percentage change in price of the good
【= (△QD / QD) / (△P / P)】
coefficient is always negative
(Law of demand: inversly related to its price)
|PED| = 1: equal proportionate change
|PED| = ∞: perfectly price elastic, 一点小价格引起无限大的变化
|PED| = 0: perfectly price inelastic, 无论价格怎么变需求量都不变
0 ＜ |PED| ＜1: price inelastic, 大的价格变化引起小的需求量变化
1 ＜ |PED| ＜∞: price elastic, 小的价格变化引起大的需求量变化
Factors affecting price elasticity of demand
availability and closeness of substitutes:
有别的替代物，这个商品就会更脆弱。一旦它有价格上的提升，consumer会毫不犹豫转向其他的substitues
degree of necessity:
越necessary (e.g. food)，越elastic，people must buy to consume even if the price increase
proportion of income spent on the product:
占比越大（例如汽车），价格一旦有变化，需求量就会有很大的变化。所以说非常elastic。
time period considered:
时间越长，越elastic。(1) consumers require time to adjust their consumption behavior. (2) over the longer-term, more substitutes may be developed. (3) technological change takes time
Application
a. pricing policies
inelastic: should increase price to increase total revenue
unitary elastic: TR remain constant
elastic: should decrease price to increase total revenue
作文画图解释：the revenue lost from the decrease/increase of price shown by area A is smaller the revenue gained from the more than proportionate increase in quantity demanded as shown by area B, thereby resulting in an overall increase in total revenue
b. non-pricing policies
marketing strategies: reduce substitutability, make the demand of the product inelastic so can increase the price
introducing different features → product innovation/differentiation
advertising
timing of decision on pricing/marketing
in short run, (inelastic) the producer can increase the price to increase total revenue
in the long run, (elastic) product innovation, promotion and marketing can be carried out to make the product less price elastic
2. Income Elasticity of Demand
definition:
YED measures the degree of responsiveness of demand of a good to a change in income, ceteris paribus
calculation:
YED = percentage change in quantity demanded / percentage change in income
【= (△QD / QD) / (△Y / Y)】
the value of YED can range from -∞ to +∞
YED＜0, inferior good (increase income will lead to decrease of demand)
YED ＞ 0: normal good (increase income will lead to an increase in demand)
0＜YED＜1 - necesisties. quantity demanded of the good by a smaller proportion at every price level in the same direction
YED＞1 - luxury goods. 赚多买多，赚少买少
Factors affecting price elasticity of demand
a. necessities versus luxury goods
b. the level of income
YED = 0
as income continues to increase, consumers also buy other good, which makes the quantity demanded for this good to keep constant
YED＜0
at a high level of income, the good is now considered as an inferior good.
YED＞0
At a low income level, the household may regard the good as a normal good. as income rises, consumers will increase consumprion of the good
applictaions
when household incomes are rising (or expected to rise)
increase production for all forms of normal goods
increase the composition of goods produced that are luxurious as the demand of luxury are income elastic
at the same time reduce the production of inferior goods
make the demand of the product more income elastic by making it more luxurious.
for luxury goods and services producers, expand the number of retail outlets and specifically expanding into countries that are enjoying rapid growth in incomes
for luxury good producers, start stocking up and increasing their inventories of goods.
when household incomes are falling (or expected to fall)
produce more necesisties (to lower losses)
promote the good as 'value for money' to the budget conscious
replace goods which are income elastic in demand with others which are considered inferior in demand
3. cross elasticity of demand
definition:
XED measures the degree of responsiveness of demand of one good to a change in the price of another good. ceteris paribus
calculation:
XED = percentage change in quantity demanded of good A/ percentage change in price of good B
【= (△QDA / QDA) / (△PB / PB)】
the value of YED can range from -∞ to +∞
b. complement
XED＜0
a. substitute
XED＞0
close substitute: YED＞1
not too close substitute: YED＜1
c. unrelated products
XED = 0
fatctors affecting XED
the larger the numerical value of the coefficient. the closer the relationship between the 2 goods
a. closeness of the substitute or complement
apllications
a. pricing policies
respond to the changes in the price of the rival's product so its TR does not suffer - rival consciousness
lower his price so that he can win over his competitor's business
b. non-price policies - marketing & sale strategies
make his goods less sustitutabe - product innovation and differentiation, improvement such as adding unique and different features in the product.
membership scheme - less replacable
advertising - influence consumer's perception of the uniqueness of the goods
stock up, display them more predominantly when there's an increase in demand of the complemetary goods
firms offers 2 goods that are complementary can package them together for sales. e.g. display them in the samek area
4. price elasticity of supply
definition:
PES measures the degree of responsiveness of quantity supplied of a good to changes in its price, ceteris paribus
calculation:
PES = percentage change in quantity supplied / percentage change in price of the good
【= (△QS / QS) / (△P / P)】
coefficient is always positive
(Law of supply: directly related to its price)
PED=1: unitary elastic
PED=+∞: perfectly elastic
PED＜1: inelastic
PED=0: perfectly inelastic
PED＞1: elastic
factors affecting PES
a. time
i. momentary period (very short run):
producer unable to respond to the price change, the supply is perfectly inelastic
ii. short run
restricted by at leats 1 fixed factor of production. the supply is relatively price inelastic
iii. long run
all fatcors of productions are variable, there will be sufficient time to increase output, the supply is relatively price elastic
b. existence of spare capacity
If spare labour and raw materials are available, increase supply quilckly in short run is possible
c. availability and durability of stocks
can store cheaply without loss of quality and quantity, supply will be relatively price elastic
d. length of production period
the shorter the time period, the more elastic the supply
e. factor mobility
mobility: the ease with which factors or production can be moved from one use to another.
f. proportion of marginal cost of production as output changes
if marginal cost of production increase sharply as output expands, quantity supplied will be less responsive to price change, relatively inelastic
application
the more price elastic the supply, the more the firm's ability to respond to changes in consumers demand
a. increasing their spare capacity - ensure their variable inputs such as labour and raw materials are readily available
b. improving their supply chain management
work on coordination and collaboration with channel partners
c. having a buffer stock scheme
(non-perishable goods) may have a buffer stock scheme where goods are stored when there is a low demand.
limitations of the use of elasticity concepts
a. assumption of ceteris paribus
costs held constant:
in reality, the decrease in price of a good results in a larger than proportinate increase in quantity demanded and this incraese in production, whcih increase the costs or production.
it is possible that the increase in cost of production may exceed the increase in total revenue
other non-price determinants are not constant in the real world
when there is a prolonged recession and worldwide decline in income
The fall in income will cause the demand to fall and hence resulting in a fall in total revenue.
it is possible that the fall in total revenue exceeds the increase in total revenue.
b. relibaility and accuracy of elasticity data
how up-to-date is the data
the source of the data
the method of data collection
c. interaticon between demand and supply
the assumption that there are no other factors (other than income, price and related goods) that are affecting the demand and supply for that product
阅读笔记40页
没考虑价格会变化。没考虑新的equilibrium point。
