LS12 - Elasticity

Question 1

PED

Answer 1

Measures responsiveness of demand given a change in price
PED = ±% demand ÷ ±% price
Elastic PED - change in demand > change in price => PED > 1
Inelastic PED - change in demand < change in price => 0< PED < 1

Question 2

Determinants of PED

Answer 2

1. Number of substitutes - more substitutes, more options available for consumers when price of original good changes, ELASTIC
2. Necessity - if product is essential, people will need it no matter what price is, INELASTIC
3. Addictiveness - if a product is addicting, people will buy it at any price, INELASTIC
4. Time - more time consumers have, more options they can explore, ELASTIC
5. Proportion of income spent on product - if price of product is a large proportion of income, consumers might not be able to afford any price changes, ELASTIC

Question 3

PES

Answer 3

Measures responsiveness of supply given a change in price
PES = ±% supply ÷ ±% price
Elastic PES - change in supply > change in price => PES > 1
Inelastic PES - change in supply < change in price => 0 < PES < 1

Question 4

Determinants of PES

Answer 4

1. Time required to produce product - if product can be produced quickly, firms can respond to changes in price quickly, ELASTIC
2. Level of spare capacity - larger spare capacity, more FAoPR available to response quickly by increasing production, ELASTIC
3. Stock/finished goods available - more stock available, firm can quickly sell high quantity in a short amount of time, if price changes, ELASTIC
4. Time - more time gives firms opportunity to expand or reduce production, ELASTIC
5. Perishability of product - the more perishable a product is, the harder it is to stockpile it, INELASTIC