Elasticity of Demand

PeD (a negative number to show the relationship between demand and price)how responsive demand is to a change in price.

PeD >1 = elasticPeD <1 = inelastic

Perfectly elastic demand - as long as the price stays the same, the product will be demanded at the same amount ‘forever’Unitary demand (PeD=1) - firm’s revenue remains constant at every possible pricePerfectly inelastic (PeD=0) - demand remains constant at whatever price

Factors affecting:S - substitute products/servicesP - proportion of income spent on the good (large proportion=goods more elastic; small proportion=goods more inelastic)L - are they luxury or necessity goods (luxury=elastic goods; necessity=inelastic goods)A - are the goods addictive (yes=inelastic goods; no=elastic goods)T - time spent to either find a substitute or react to the change in price (eg.flight change for tmr=inelastic; change for xmas=elastic) [do the consumers have time to react and rethink?] (longer the time=more elastic because there’s more time to change your mind)

PeS (a positive number to show relationship between supply and price)how much quantity supplied of a good changes when there is a change in the price of the good

Factors affecting: Population Weather Trends & fashions Time (immediate increase in price, producers unable to raise output=perfectly inelastic [eg.wheat]) {short

term: can raise output by adding more variable inputs, eg. labour and materials} {long term: all inputs can be increased including capital, and more firms can enter the industry=more elastic}

availability of stocks (firms that have extra storage capacity can quickly increase supply)firm operating at full capacity? (if there’s spare capacity, it’s easier to increase production in response to price rise)

length of production period (more quickly the good can be made, easier to respond to price rise) no. of producers (fewer barriers to entry, easier for firms to enter the market and increase supply of good if

the price rises=elastic) how quickly it is to switch products (if resources can be shifted to produce another product more easily,

supply increases=elastic)

Equation:PeD= % change in quantity demand

% change in price

If you want PeS, just substitute the word ‘supply’ into the place where ‘demand’ is. Normally, most questions would be on PeD rather than PeS because PeD’s more useful (the only questions on PeS so far are found in the multiple choice paper)