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PED a measure of how quantity demanded of a good responds to a change in price

PED: Percentage change in quantity demanded/percentage change in price

PED usually negative as demand falls as price increases for most goods

Different types of elasticities

Elastic

PED value create than 1, demand is elastic

Percentage change in price will cause larger percentage change in quantity demanded

Higher PED value, the more elastic demand is for the good

Perfectly Elastic Demand has a PED of infinity, any increase in price means demand will fall to zero

Inelastic

PED value for goods with inelastic demand is between 0 - 1

Means percentage change in price will cause smaller percentage in quantity demanded

smaller value of PEd, the more inelastic demand is for the good

Perfectly inelastic demand has a PED of 0

Change in price no effect on quanta demanded

Unit Elasticity of Demand- PED-1

Good has unit elasticity if the percentage change in price is qual to size of percentage change in quantity demanded

Income Elasticity of Demand (Led) measures how much demand for a good changes with change in real income

YED: Percentage change in quantity demanded of a good/percentage change in real income

Income Elastic- YED>1

Income Inelastic- YED<1

Perfectly inelastic- YED=0

Cross Elasticity of demand (XED) is a measure of how the quantity demanded of one good responds to a change in price of another good

XED: percentage change in quantity demanded of good A/ percentage change in price of good B

Subsitutes- XED positive

Complements- XED negative

Factors which influence PED

Substitutes

-More Substitues avaliable, the more price elastic demand is

- Number of substitutes available depends on how closely the good is defined

Type of good

- Demand for essential items is price inelastic

-Non essential items price elastic

-Habit forming goods tend to be price inelastic

-Purchases which cant be postponed tend to be price inelastic

-Products with several uses tend to be price inelastic

Percentage of income spent on good

- Demand for products that need large proportion of consumer income is more price elastic

Tend to shop around for best price of expensive good

Time

- Long run demand becomes more price elastic as it becomes easier to change alternatives

Relationship between Total Revenue and PED

Elasticity changes along demand curve

Top High price zero demand

End zero price, high quantity

Total Revenue maximised when PED = 1

Good has elastic demand:

Reduction in price, increase firms revenue

Increase in price,reduce total revenue

Good has inelastic demand:

Reduction in price will reduce firms total revenue

Increase in price will increase firms total revenue

Income elasticity of demand different for normal and inferior goods

Normal goods

Have a positive YED 0-1

Income rises, demand increases

Size of demand increase is dependent on products elasticity

if Yed of product is elastic over 1 its a luxury/superior good

Inferior Goods

Have a negative YED <0

Income rises, demand falls

Rise in income will lead to inferior good being replaced by one of higher quality

Cross Elasticity of Demand

Highlights whether goods are substitutes or complements

Substitutes have positive Cross elasticitys of demand

Fall in price of one substitute will reduce the demand for another

Closer the substitute, the higher the positive XED

Goods which are complement have negative XEDS

Increase in price of good will lead to a reduction in demand for its complements

Goods with XED of zero are independent goods and dont directly affect demand off each other

Price elasticity of supply

Measure of how the quantity supplied of a good responds to a change in its price

PES:Percentage change in quantity supplied/percentage change in price

PES generally positive as higher the price, greater the supply

Elastic PES>1

if value of PES greater than 1, supply of good is elastic

Percentage change in price will cause a larger percentage change in quantity supplied

Higher the Value of PES, the more elastic the supply is for the good

Perfectly elastic supply has PES of infinity any fall in price means that the quantity supplied will be reduced to zero

Inelastic PES<1

Value of PES for inelastic good is between 0 and 1

Percentage change in price will cause a smaller percentage change in quantity supplied

Smaller the value of PES, more inelastic supply is

Perfectly inelastic supply has PES of 0, change in price will have no effect on the quantity supplied

At any price, quantity supplied will be the same

Unit Elasticity of Supply: PES=1

Good has unit elasticity if the percentage change in quantity supplied is equal to percentage change in price

Higher PES is important to firms

Aim to respond quickly to changes in price and demand

Need to make supply as elastic as possible;e

Measures undertaken to improve elasticity of supply include flexible working, using latest technology and having spare productionn capacity

Supply is price inelastic in the short run

Over short periods of time firms find it difficult to switch production from one good to another

Supply likely to be more price inelastic in short run

Short run, time period when firms capacity is fixed and one factor of production is fixed

Capital often the factor of production that is fixed in the short run

Long run all factors of production variable

Able to increase its capacity

Supply is more elastic in the long because firms have longer to react to changes in price and demand

Other factors which affect PES

Periods of unemployment, supply tends to be more elastic as easy to attract new workers

Perishable goods have inelastic supply as cant be stored long

Firms which possess high stock levels have elastic supply- increase supply quickly if they want

Industries with more mobile factors of production tend to have more elastic supply.