APPECO LESSON 4 Flashcards
A ____ is when there is an excess demand for the quantity supplied. While
surplus is excess in supply.
shortage
E.g., if there are 10 bottles of water & there are 20 students who want drinking
these, then there will be only 10 students whose demands are met while the
others will not be able to be given anything.
There is shortage in the supply.
If producers make too many bottles of water & consumers cannot by them want
to buy them, _____
there will be surplus.
Explains the interaction between the sellers of a product & the buyers. It shows
the relationship between the availability of a particular product & the desire (or
demand) for that product has on its price.
The Law of Supply & Demand
____ measures the responsiveness of the quantity demanded or
supplied of a good to a change in its price.
Price elasticity
Elasticity can be described as (2)
a) Elastic (or very responsive)
b) Unit elastic / Inelastic (or not very responsive)
Effects of Change in Demand & Supply
(3)
- ELASTIC DEMAND
- INELASTIC DEMAND
- UNITARY ELASTICITY
Or supply curve indicates that quantity demanded or supplied respond to price
changes in a greater than proportional manner.
A. Elastic Demand
Or supply curve is one where a given percentage change in price will cause a
smaller percentage change in quantity demanded or supplied.
B. Inelastic Demand
Means that a given percentage changes in prices leads to an equal percentage
change in quantity demanded or supplied.
C. Unitary Elasticity
Categories of Price Elasticity (4)
According to Agarwal, P. (2018) & Judge, S. (2020),
1) The Price Elasticity of Demand
2) The Income Elasticity of Demand (YED)
3) Cross Price Elasticity of Demand (XED)
4) Price Elasticity of Supply (PES)
Is the responsiveness of quantity demanded, or how much quantity demanded
changes, given a change in the price of goods or services.
I. The Price Elasticity of Demand
*The mathematical value is negative. A negative value indicates an inverse
relationship between price & the quantity demanded. But the negative sign is
ignored (Judge, S. 2020).
I. The Price Elasticity of Demand
I. The Price Elasticity of Demand (5)
- ELASTIC DEMAND
- INELASTIC DEMAND
- UNITARY ELASTIC DEMAND
- PERFECTLY ELASTIC
- PERFECTLY INELASTIC
The percentage change in price brings about a
more than proportionate change in quantity
demanded.
a) Elastic Demand (PED > 1) –
– (coefficient of the elasticity is less than 1), is when an
increase in price causes a smaller % fall in demand.
b) Inelastic Demand
– When the percentage change in quantity demanded is
less than the percentage change in price, & the
coefficient of the elasticity is less than 1.
b) Inelastic Demand
– e.g., Gasoline has few alternatives; people with cars
consider it as a necessity & they need to buy gasoline.
There are weak substitutes, such as train riding, walking
& buses. If the price of gasoline goes up, demand is very
inelastic. Other Examples: Diamonds, aircon, Iphone,
Cigarettes.
b) Inelastic Demand
– When the percentage change in demand is equal
to the percentage change in price, the product is
said to have ____
c) Unitary Elastic Demand
– – PED or the price elasticity of
demand is 1
Unitary elastic
– A small percentage change in rpcie brings aobut a
change in quantity demanded from zero to infinity. –
d) Perfectly Elastic
– the coefficient of elasticity is equal to infinity (∞).
d) Perfectly Elastic
The PED is = 0 any change in price will not have any
effect on the demand of the product. –
e) Perfectly Inelastic –
– the percentage change in demand will be equal to zero
(0).
e) Perfectly Inelastic –
The midpoint elasticity is less than 1. (Ed < 1). Price reduction leads to
reduction in the total revenue of the firm.
Point Elasticity
The demand curve is linear (straight line), it has a unitary elasticity at the
midpoint. The total revenue is maximum at this point.
Point Elasticity
Any point above the midpoint has elasticity greater than 1, (Ed > 1).
Point Elasticity
is the relationship between changes in
quantity demanded for a good & a change in real income.
II. The Income Elasticity of Demand (YED)
.
YED = % change in demand, % change in income
II. The Income Elasticity of Demand (YED)
II. The Income Elasticity of Demand (YED)
(2)
- NORMAL GOODS
- INFERIOR GOODS
Are those goods for which the demand rises as consumer income rises;
positive income elasticity of demand so as consumers’ income rises.
A. Normal Goods
YED is positive. As income rises, the proportion spent on cheap goods will
reduce as now they can afford to buy more expensive goods
A. Normal Goods
E.g., (the demand for units of air-conditioning increases as the income of the
consumer increases & the demand for electric fan decreases).
A. Normal Goods
____ Goods: units of air-conditioning; ____ Goods: electric fan
Normal, Inferior
The demand decreases when consumer income rises; demand increases
when consumer income decreases.
B. Inferior Goods
Shifts to the left as income rises. YED is negative. As income rises, the
proportion spent on cheap goods will reduce as now they can afford to buy
more expensive goods.
B. Inferior Goods
E.g., the demand for cheap/generic electronic goods (let’s say electric fans –
will fall as people income rises & they will switch to expensive branded
electronic goods (unit of air-conditioning)
B. Inferior Goods
____ is the effect on the change in demand of one
good as a result of a change in price of related to another product.
Cross price elasticity of demand
o XED = % change in quantity demanded of good (X), % change in price
of good (Y)
Cross price elasticity of demand
If the value of XED is positive –
substitute goods
If the value of XED is negative –
complements goods
If the value of XED is zero –
two goods are unrelated
The measure of the responsiveness of quantity to a change in price. It is the
percentage change in supply as compared to the percentage change in price
of a commodity.
IV. Price Elasticity of Supply (PES)
o PES = % change in quantity supplied, % change in price
IV. Price Elasticity of Supply (PES)
Determinants of Price Elasticity of Supply (5)
Agarwal, P. (2020) said, price elasticity of supply can be influenced by the following
factors:
- Marginal Cost:
- Time:
- No. of Firms:
- Mobility of Factors of Production:
- Capacity:
: If the cost of producing one more unit keeps rising as output
rises or marginal cost rises rapidly with an increase in output,
the rate of output production will be limited. The Price
Elasticity of Supply will be inelastic – the percentage of
quantity supplied changes less than the change in price. If
Marginal Cost rises slowly, supply will be elastic
- Marginal Cost
: Over time price elasticity of supply tends to become more elastic. The
producers would increase the quantity supplied by a larger percentage
than an increase in price.
Time
: The larger the no. of firms, the more likely the supply is elastic.
The firms can jump in to fill in the void in supply.
No. of Firms
: If factors of production are movable, the
price elasticity of supply tends to be more
elastic. The labor & other inputs can be
brought in from other location ton
increase the capacity quickly
Mobility of Factors of Production
: If firms have spare capacity, the price elasticity of supply is elastic.
The firm can increase in costs, & quickly with a change in price.
Capacity
