Business Studies

Elasticity

Factors that affect demand

1.

2.

s in the prices of other products Substitute products Used in place of another product. If P for substitute , more substitute product will be bought and demand for original product will (diag 2) Complementary products tend to be bought & consumed together. If one product is bought less, the other demand will also (diag 2) s in income If income there will be less demand for products (diag 2) s in taste and fashion if a product becomes very popular, demand will (diag 1) A in advertising if the advertising campaign is successful, demand will (diag 1)

D1 D

Diagram 1: Increase in S Demand

P1

ec Pr i )$ (

S 0 Q Q1

D1 D

Quantity demanded and supplied per week

D D1

Diagram 2: Decrease in Demand

S

ec Pr i )$ (

P1

S D1 0 Q1 Q D

Quantity demanded and supplied per week

Price Elasticity of demand seeing the responsive for a product due to a in price The responsiveness of quantity demanded, or how much quantity demanded changes, given a change in the price of goods or service is known as the price elasticity of demand. Price Elasticity of demand (PED)= % change in quantity demanded% / Change in price

In Close Substitute markets, If price even a little, demand of the product will a lot (elastic demand curve)

Demand for a product is said to be ELASTIC if the percentage change is demand is more than the percentage change in price. The value of PED is more than 1.
When the Qd is very sensitive to price Example: Luxury item like houses/ cars/ jewellery

If no close substitutes, like Petrol, even a big in Price will not cause a big fall in demand for Petrol as people still buy the product. Inelastic demand curve

When there is a smaller percentage change in quantity demanded as compared to the percentage change in its price, the product is said to price INELASTIC. The value of PED is less than 1. When the Qd is not
very sensitive to price Example: Essential items such as food, clothing , utilities

Factors affecting Price Elasticity of demand Number of substitutes: If a product has many substitutes it is likely that the demand for the product is price elastic. Whether the product is a necessity or a luxury: Demand for Goods and services which are considered as a necessity is more likely to price inelastic. Period of time: Most products demand is less elastic in the short run than in the long run. In the long run, if the price of a product rises consumers will search for cheaper substitutes. The proportion of income spend on a commodity: If the proportion of income spent on the product is small, then even a substantial change in price of that commodity may have little effect on its demand.

Other measures of Elasticity of Demand

Income elasticity of demand

It is the % change in quantity demanded as compared to the % change in income.

Income elasticity of demand= % change in quantity demanded / % Change in Income

The commodities for which the demand falls with the increase in price are known as inferior goods. For an inferior good, the percentage rise in income causes only a small increase in demand and is income inelastic.

Other measures of Elasticity of Demand

Cross elasticity of demand It is the % change in quantity demanded as compared to the % change in price of another product. Cross elasticity of demand = % change in quantity demanded of good X% Change in price of good Y The cross elasticity of substitute goods is always positive because a rise in the price of one causes a rise in the demand for the other commodity. The cross elasticity of demand for complementary goods will always be negative because a rise in the price of one causes fall in the demand for the other commodity.

Types of Price Elasticity

Unitary Elastic for the Elasticity of Demand is a proportionate change in price and quantity. This means that the reaction of consumers to price changes is stable and not dramatic like elastic products, and not small or no changes in quantity like inelastic products. It's in the middle of these two. As price goes up or down for unitary products, the total revenue from it stays relatively the same.

as quantity is totally unresponsive of price, consumer has no alternative in perfectly inelastic demand, he will pay any price for it. examples are air, water, electricity etc

Factors that affect supply curve

s in the cost of supplying the product to the market If expensive, then supply will fall (see diag 2) as cost Improvement in technology cheaper to produce the product and supply would (see diag 1) Taxes Higher taxes means more expensive to supply thus supply . (see diag 2) Climate & weather good weather will result in good harvest thus in supply (see diag 1)

Price Elasticity of Supply

Price elasticity of supply is a measure of the responsiveness of quantity to a change in price. In other words, it the percentage change in supply as compared to the percentage change in price of a commodity. Price Elasticity of Supply =% change in quantity Supplied% Change in priceSupply is Price Elastic when the percentage change in quantity supplied is more than the percentage change in Price of the comoditity. PES is more than 1.