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 | ||
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