Elasticity 2

Elasticity 2

1. XED

   • % change in the demand for good x / % change in the price of good Y
   • With substitute goods such as washing machine brands,
     • An increase in the price of one good will lead to an increase in demand for the rival product
       • XED = Postive
         • Pretty elastic
   • With complementary goods such as petrol and cars
     • XED = negative
       • Pretty inelastic

2. PES

   • % change in quantity supplied/ % change in price
   • PES is greater than 1 - Supply is price elastic
   • PES is less than 1- Supply is price inelastic
   • PES=0 - Supply is perfectly inelastic
   • PES= Infinity- Supply is perfectly elastic following a change in demand
   • Factors affecting PES
     • Spare production capacity
       • If there is plenty of spare capacity then a business can increase output without a rise in costs and supply will be elastic in response to a change in demand
         • Supply of goods and services is most elastic during a recession
     • Stock of finished products and components
       • If stocks of raw materials and finished products are at a high level then a firm is able to respond to a change in demand
     • The ease and cost of factor substitution
       • If both capital and labour are occupationally mobile then the elasticity of supply for a product is higher than if capital and labour can't be easily switched
         • E.g. Printing press which can switch between printing magazines and greeting cards
     • Time period
       • Supply is more price elastic the longer the time period that a firm is allowed to adjust its production levels