Backnotes

Elasticity

PED (Price Elasticity in Demand):

PED measures the responsiveness of quantity demanded to a change in price.

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PED Formulae:
Percentage change in quantity demanded divided by percentage change in price

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PED Elasticity: 

  • Percentage change in quantity demanded < Percentage change in price
  • PED > 1
  • Gentle slope on the demand curve
  • Non-necessities/luxury goods
  • Example(s): Holiday, newspaper, etc.
ped graph.JPG

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PED Inelasticity: 

  • Percentage change in quantity demanded > Percentage change in price
  • PED < 1
  • Steep slope on the demand curve
  • Necessities 
  • Example(s): Electricity, water, etc.

Factors Affecting Elasticity of Demand:

  • The number and closeness of substitutes (the more the number of substitutes the more the demand will be elastic). 
  • The degree of necessity (the higher degree of necessity for the individual makes the product price inelastic such as smokers and cigarettes and medical conditions and medications.
  • The proportion of income spent (the larger the proportion of income  spent on a product the demand will be price elastic)
  • Time period.

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Use of PED:

Businesses use PED to inform them on their pricing decisions, for example, for inelastic goods, it benefits firms as they can identify when to increase prices as QD decreases, and therefore the total revenue will increase.

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PES (Price Elasticity in Supply):

PES measures the responsiveness of quantity supplied to a change in price.

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PES Formulae:

Percentage change in quantity supplied divided by percentage change in price

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PES Elasticity: 

  • Percentage change in quantity supplied < Percentage change in price
  • PES  > 1
  • Gentle slope on the supply curve
  • Non-necessities/luxury goods
  • Example(s): Holiday, newspaper, etc.
pes graph.JPG

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PES Inelasticity: 

  • Percentage change in quantity supplied > Percentage change in price
  • PES < 1
  • Steep slope on the supply curve
  • Necessities 
  • Example(s): Electricity, water, etc.

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Factors Affecting Elasticity of Supply:

  • Availability of factors of production
  • Mobility of factors of production
  • Ability to stock the goods
  • Time period

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Use for PES: 

Businesses use PES to inform them on their pricing decisions, for example, for inelastic goods, it benefits firms as they can identify when to increase prices as QS increases, and therefore the total revenue will increase.