Price Elasticity of Demand and Supply

PED

It is the degree of responsiveness of the change in demand to a given change in price, ceteris paribus

Differences in PED Values

PED < 1 is price inelastic (barely much change in price)

PED > 1 is price elastic (very large change in price)

PED=1 (any change will result in exactly equal change in price)

PED = 0 (any change in price will not affect demand)

PED = infinite (when price changes, demand drops to zero)

Factors that affect PED

Availability of Close Substitutes

Proportion of Income spent

Time Period

Degree of Necessity

PES

It is the degree of responsiveness of the change in supply to a given change in price

How to tackle/ change

Create perceived differences (idol endorsed) or real differences (adding extra stuff)

Price Strategies (reduced price for students for movie tickets)

Government Interventions

Taxes

To raise revenue through tax (Tax sth that PED inelastic)

To discourage consumption (Tax PED elastic)

Subsidies

Encourage production (PED inelastic)

The extent of the subsidy (More price inelastic means lesser money required)

Factors that affect PES

Length of Gestation (Time taken for to produce)

Short Run VS Long Run (Availability of FOP)

Available Inventory Stock (The amt of ready to sell goods)

Existence of spare capacity (The amt of unused FOP)

Mobility of FOP (Not all FOP is homogenous, depends on how elastic the FOP is, like how workers with multiple skills are more mobile)

Limitation of Elasticity

  1. Assumption of Ceteris Paribus
  1. Inaccurate data, out of date data, computation issues
  1. Cost of production (while it may increase total revenue, may not increase PROFIT)
  1. Productive Capacity not taken into account (even if they should move closer to ped=1, they may not have the capacity to do so)