Elasticity: Price Elasticity of Demand

Unitary Elastic demand

A change in price leads to a proportionately equal change in the quantity demanded. PED = 1

Price Elastic Demand

A change in price leads to a proportionately greater change in the quantity demanded. PED > 1

Price inelastic demand

A change in price leads to a proportionately smaller change in the quantity demanded. 0 < PED < 1

Perfectly Inelastic demand

A change in price leads to no change in the quantity demanded PED = 0

Primary Commodities

goods that come directly from natural resources or 'land'. They tend to be unprocessed raw materials. e.g. food.

Manufactured goods

man-made goods that have been produced from raw materials, which have been transformed through a production process.

Effects of increased price of inelastic goods on revenue

Increase in price causes a smaller decrease in quantity so total revenue for firms are increased.

PED formula

% change in quantity demanded / % change in price

Determinants of PED (PANTDP)

-Number of close substitutes -Degree of necessity -Addictiveness -Proportion of income - Time period - Peak and off peak

Perfectly Elastic Demand

A tiny change in price would lead to an infinite change in the quantity demanded. PED = ∞

Sign of PED

As price increases, quantity demanded will always fall so PED is always negative but by convention, PED is considered as positive.

PED of manufactured goods

High elasticity because high product differentiation and lots of substitutes for the manufactured good.

PED of primary commodities

Low PED (Inelastic) because goods like food are necessities that have no substitutes. Also small portion of income.

Effects of increased price of elastic good on revenue

Small increase in price causes a large decrease in quantity so total revenue for firms are reduced.

Price Elasticity of Demand (PED)

a measure of the responsiveness of the quantity demanded of a good or service to changes in its own price.

Elasticity

a measure of the responsiveness of the quantity demanded or supplied of a good or service, to changes in any of the factors that determines it.

Total Revenue (TR)

the amount of money received by firms for selling a good or service. Price of the good (P) multiplied by the quantity sold (Q): P × Q