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Price elasticity of demand
PES
Price elasticity of supply measures the responsiveness to the supply of a good or service after a change in its market price.
Price elasticity of demand is the percentage change in the quantity demanded of a good or service divided by the percentage change in the price
Formula : PED = % change in quantity demanded / % change in price
In general when PED is greater than 1, demand is price elastic. If PED is less than 1, demand is price inelastic
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Determinants of PED
If the product is a necessity; the products price would usually be more inelastic as the consumers can't go without necessary items
Uses of PES
Firms may take actions using the PES to help with their responsiveness to market changes.
If the product has many close substitutes; the products price would usually be elastic as the consumers have many other options to choose from.
The amount of time consumers have to search for substitutes; as the more the consumers research the more elastic the products price is as if it increases they can just search for a cheaper substitute
employing the latest productive equipment
investing in storage and spare productive capacity
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Determinants of PES
If the cost of switching to a different supplier; is lesser than
time scale, barriers to entry, nature of goods, ability to price discriminate and mobility of factors of production.
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Significance of PED
FORMULA
PES - % change in quantity supplied / % change in price
Customer: which products to buy and which to not
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time scale, barriers to entry, nature of goods, ability to price discriminate and mobility of factors of production.
Producer: to increase or decrease the price to increase revenue