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 = elastic

PeD <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) - firms revenue remains constant at every possible price
Perfectly inelastic (PeD=0) - demand remains constant at whatever price

Factors affecting:
S - substitute products/services
P - 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 theres 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 theres spare capacity, its 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 PeDs more useful (the only
questions on PeS so far are found in the multiple choice paper)