Notes on Price Elasticity of Demand (PED) & Price Elasticity of Supply (PES)

DETERMINANTS

Price Elastic Demand (PED>1)

Price Inelastic Demand (PED<1)

1) Availability & Closeness of Substitutes

Many & close substitutes available

Few & weak substitutes

2) Proportion of Income spent on Good

High Proportion

Low Proportion

3) Degree of Necessity

Low degree / Non-essential (Luxury) good

High degree / Essential good

4)Addictiveness

Habit forming

NA or Insignificant

Addictive

5) Definition of Good

Narrow

Eg Roti Prata

Broad

Eg Food

6) Time Horizon

Longer time period

Shorter time period

Key Explanation

PED > 1

Dd for good is price elastic

Change in P will lead to a more than proportionate change in Qtd

PED < 1

Dd for good is price inelastic

Change in P will lead to a less than proportionate change in Qtd

Math

Gentle slope

Steep slope

Raw PED is negative, which reflects inverse relationship between Price & Quantity demanded. However, we usually take absolute |PED| for convenience. Hence PED<1 or PED>1

Extreme cases:

PED can be 0.   Dd perfectly price-inelastic.  Vertical Dd curve.

Example: Legislation of Compulsory Education.

PED can be Infinity.   Dd perfectly price-elastic.  Horizontal Dd curve. Example: PC firm (under Market Structure topic)

DETERMINANTS

Price Elastic Supply (PES>1)

Price Inelastic Supply (PES<1)

1) No. of firms

Many firms

Few firms

2) Extent of Spare capacity & availability of resources

Resources are readily available to increase production, esp capital goods. “Got spare”

Insufficient. “No spare”

3) Factor Mobility & Substitutability

FOPs can be easily shifted across production processes / economic sectors. Labour can quite easily substitute for Capital goods & vice versa.

eg Retail/F&B 

Specialised machinery & labour required. Cannot easily mobilise or substitute FOPs 

eg Healthcare

4) Time for Production

Short time   eg Manufacturing

Long time   eg Agriculture

5) Availability / Ease of Stocks

Easy to Keep Stocks / Significant stocks available

eg Manufactured goods

Hard to Keep Stocks

eg Agricultural (perishable)

6) Time Horizon

Longer time period

Shorter time period

Key Explanation

PES > 1

SS of good is price elastic

Change in P will lead to a more than proportionate change in Qts

PES < 1

SS of good is price inelastic

Change in P will lead to a less than proportionate change in Qts

Math

Gentle slope

Steep slope

PES almost always positive, which reflects positive relationship between Price and Quantity Supplied as per Law of Supply.

Extreme cases:

PES can be 0.   SS perfectly price-inelastic. Vertical SS curve.  Example: Quota

PES can be Infinity.   SS perfectly price-elastic. Horizontal SS curve. Example: World Supply (under International Trade topic) To get your hands on my concise and accurate JC A Level and IB