elasticity of supply & demand Flashcards
What happens when 0<PES<1 and PES>1?
the bigger the PES, the more producers respond to the price.
when 0 < PES < 1, price is inelastic so producers not willing to enter the market
When PES > 1, price is elastic so producers are willing and easier to enter the market
Equation for PES
% change of quantity supplied / change of price
|PES| =1
Unnitary Price Elastic Supply : when change in price of the good results in a proportionate change in quantity supplied of the good in same direction, ceteris paribus
PES = 0
Perfectly Price Inelastic Supply : a given change in the price of the good itself produces no change in the quantity supplied, ceteris paribus. totally unresponsive when price changes (vertical line)
PES| -> infinity
Perfectly Price Elastic Supplied: a given change in price of good leads to an infinitely large change in quantity supplied, ceteris paribus. totally responsive when price changes (horizontal line)
[PES] Determinants: Mobility of factors of production
(ease = elastic)
geographical mobility - ease with moving between physical locations
occupational mobility - ease when moving between different industries (inelastic when job require specialized/ high skills)
[PES] Determinants: Existence of spare capacity
(greater = elastic)
means when not fully utilised, firms can increase production
[PES] Determinants: Availability of stock
(larger means able to respond better to price changes = elastic)
cuz when they don’t have the inputs, it is difficult to respond to an increase in quantity demanded by increasing the supply of good
[PES] Determinants:Time period
less = inelastic
cuz takes time to obtain more inputs. New firms also need time to enter the market.
more = elastic
cuz able to obtain more inputs and only when they are assured that the price increase is not a temporary phenomenon
eg. more time to flow more resources into an industry through expansion of existing firms / source for inputs
[PES] Determinants:Length and complexity of the production process
simple = elastic
cuz more able to adjust production levels according to the change in prices.
complicated = inelastic
cuz complex production process takes a long time so less able to adjust production levels according to the change in prices
What happens when 0<PED<1 and PED>1?
the bigger the PED, the more ppl respond to the price.
when 0 < PED < 1, ppl are insensitive to price change (price inelastic demand).
When PED > 1, price is elastic so ppl are sensitive to the price change.
Why PES +ve sign?
Law of supply states that quantity supplied is direct related to its price.
Why PED -ve sign?
Law of demand states that quantity demanded is inversely related to its price.
Equation for PED
% change of quantity demanded / change of price
|PED| =1
Unnitary Price Elastic Demand
when change in price of the good results in a proportionate change in quantity demanded of the good in opp direction, ceteris paribus
PED = 0
Perfectly Price Inelastic Demand
change in the price of the good itself produces no change in the quantity demanded, ceteris paribus. totally unresponsive when price changes
(vertical line)
|PED| -> infinity
Perfectly Price Elastic Demand
change in price of good leads to an infinitely large change in quantity demanded, ceteris paribus. totally responsive when price changes (horizontal line)
[PED] Determinants: availability & closeness of Substitutes
Determinants of PED: (SAINT)
(greater =elastic)
cuz consumers can readily switch to other products that satisfy the same want
[PED] Determinants:Addiction
(greater = INELASTIC)
cuz more willing to pay to satisfy their addiction
[PED] Determinants: proportion of Income spent on the good
(greater = elastic)
cuz more significant reduction in consumer’s income or purchasing power
[PED] Determinants: degree of Necessity
(greater = INELASTIC)
cuz the good is smth cannot do without
[PED] Determinants: Time period
(longer = elastic)
cuz consumer can spend time to make purchasing decision to get info on availability of substitutes, compare prices, adapt their tastes and preferences
What is PED?
measures the degree of responsiveness of a good’s quantity demanded to a change in price.
what a PED value of -0.37 means
1% change in price would bring about only a 0.37% change in Qd in the opposite direction (PED = % change in Qd/ % change in price)
