Define Price Elasticity of Supply (PES)?
PES is the responsiveness of quantity supplied due to a change in price
What is the formula for PES?
Percentage change in Quantity Supplied / Percentage change in Price
What are the five degrees of Price elasticity of supply (PES)?
PES- 0 Perfectly inelastic (no change in QS even if you change price
PES <1 Inelastic (When price changes the quantity supplied will change proportionally less then change in price)
PES = 1 Unitary
PES >1 Elastic
PES - ♾️ perfectly elastic
What are the diagrams for the 5 degrees of PES?
PES - 0 |
PES< 1 / slightly
PES = 1 / perfect supply line
PES > 1 / almost horizontal
PES - ♾️ —
What are the factors which affect PES?
REMEMBER PSSST!!!!!!!
*Production lag - (the longer the production lag for a good or service the more inelastic a good would be)
*Stocks - (larger level of stock more elastic supply)
*Spare capacity - ( more spare capacity more elastic because if price or demand increase you cna utilise the spare capacity)
*Substitutability of FoPs - (more substitutes of FoPs more elastic, if there is car factory and demand for vans is high they can substitute workers firm car to van
*Time (SR price is inelastic, LR elastic)
What is Cross elasticity of Demand (XED)?
XED is the responsiveness of quantity demanded of a good or service due to a change in price of another good or service
What is the equation for Cross elasticity of demand?
Percentage change in quantity demanded GOOD 1 / Percentage change in price GOOD 2
What are meanings behind signs of an XED equation answer
look at sign of equations
If Positve - the two goods are substitute goods - ( if the price of a substitute goes up, quantity demanded in the other would go up so both positive)
If negative - the two goods are complimentary goods (if the price of complement goes up demand for other will go down making it negative)
Party Season Near Christmas
Positive Substitute Negative Complement
What are the three degrees for cross elasticity of demand XED?
XED >1 Demand between goods is elastic (strongly related)
XED 0 zero cross elasticity of demand because the goods are very unrelated to each other like cheese and printers
XED < 1 Demand between goods is inelastic (weakly related)
ignore signs for this
What are the diagrams for the three degrees of XED?
SEE SKELETON BOOKLET
/ positive demand for substitutes
\ negative demand for complements
| zero elasticity for unrelated goods
put price of good on y and quantity of another good on x
Define Income elasticity of demand (YED)
YED is the responsiveness of quantity demanded due to a change in income
What is the equation of income elasticity of demand (YED)?
YED = % change in quantity demanded due / % change in income
What do the signs of the answers to the income elasticity of income equation mean
Positive - normal good (if income goes up demand goes up)
Negative - inferior goods (if income goes up demand goes down)
What are the three degrees of income elasticity of demand?
ignore signs
YED > 1 demand is income elastic (demand increases proportionally more then income) normal luxury
YED < 1 demand is income inelastic (demand increases proportionally less then income) necessity
YED = 0 perfectly inelastic essential
What are the three diagrams for the degrees of income elasticity of demand?
see skelton
income on y axis, quantity on x
/ positive demand for normal goods
\ negative demand for inferior goods
| vertical demand for essential goods where demand does not change no matter income
How is PES used in business?
Find ways to make price elastic so they can make their supply flexible, to do this :
-reduce production lag time
-increase level of stock
-increase spare capacity (unused resources) by employing more labour our more capital stock
How is XED used in business?
-pricing decision (if business produce complement goods they decrease price of printer and increase price of ink for more revenue) (substitutes can consider cut price)
-employment, stocks and output (if substitutes and lower price you must be prepared to increase stocks but if you increase price you must prepare to decrease output)
How is YED used in business?
-pricing decisions plan boom and recession (primark sees recession means more demand because they are for low income:
What are the limitations of using elasticity in business decisions?
-elastic figures are estimates , their made by surveys and past data but current consumer habits may change (inaccurate and unreliable)
-assume cetris paribus - only one factor affecting the elasticity but other things affect demand and supply
- PED varies along demand curve
