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Elasticities measure of the responsiveness of a variable to change in…
Elasticities
measure of the responsiveness of a variable to change in price
Price Elasticity of Supply
Def: measure of how responsive the quantity supplied of a good or service is to changes in its price
PES
= %change in Qs / %change in Price
Diagram
Determinant
ability to store stock:
Goods that can be stored are often more elastic, as suppliers can release stock in response to price increases
Unused capacity
: Firms with idle resources can increase supply more easily when prices rise
Mobility of factors of production
: If resources can be reallocated easily, supply is more elastic.
Time period
: Supply tends to be more elastic over longer periods, as firms have more time to adjust production.
Price Elasticity of Demand
PED
= %change in Qd / %change in Price
Def: measure of how responsive the quantity demand of a good or service is to changes in its price
Diagram
PED varies
Demand is price-elastic at high price and low quantities
demand price-inelastic at low price and large quantity
midpoint > demand curve is unit elastic demand
PED = 1/slope x p/q
Determinant
Number of closeness of subtitutes
Necessities vs luxuries
length of time
Proportion of income spent on a good
Primary commodities have a lower PED compared to manufactured product
Income Elasticity of Demand
Def: Measurement of responsiveness of demand to change in income
-ve (inferior goods), +ve(normal goods)
YED<0 , Negative income elasticity of demand indicates good is inferior good. As increase in income, demand for good decrease
YED> 1, A percentage change in quantity demand is larger than percentage change in income. It indicates the good is luxuries good. As increase in income, larger percentage of quantity demand increase
YED <1, A percentage in quantity demanded is less than percentage change in income. It indicates good is a necessity goods. Increase in income, increase in small percentage of quantity demand
YED
: %change in Qd/ %change in Y
Engel curve
Applications of income elasticity of demand
YED and producers: the rate of expansion of industries
The higher YED for good or services, the greater expansion of its market
YED and the sectoral structure of economy
-Primary sector: YED is positive but less than 1(income inelastic)
-As the society's income grows, the demand for agricultural output grows slowly
-the share of agricultural output in total output in economy shrinks
