4/11/21
Elasticity
Recap task
Competitive supply – when a firm can supply alternative products using its factors of production, for example land to
grow crops or to grow biofuel
Joint supply – when more than one product can be supplied together, for example wool and sheepskin, beef and
hide
Composite supply – when a product can be supplied to more than one market, for example apples for the cider
market or apples for the apple juice market
Recap Task – factors influencing supply
Price of the product: price rise, higher profits, supply rises
Taxes: tax increase, lower profits, supply increases
Subsidies: subsidy increase, higher profits, supply decreases
Costs of production: higher costs, lower profits, supply decreases
Measuring price elasti city of demand (PED)
% change∈quantity demanded
Price elasticity of demand=
% change∈ price
Measures how responsive the demand is to a change in price
The answer is always negative because of the inverse relationship between quantity demanded and price
Percentages
( new value−old value)
Percentage change= ×100
old value
PED
If PED is:
0:
- There is no change – demand is perfectly inelastic
- The demand curve is vertical – there is no change in demand following a price change
- Examples include basic necessities (like water), life saving products (like medicine), addictive
products (like drugs such as cigarettes), habit-forming products (like people who collect items)
Between 0 and -1
- Demand is price inelastic
- % change in demand is smaller than % change in price, demand not very responsive, relatively steep
demand curve
Exactly -1
- Demand has unit or unitary elasticity
- % change in price and quantity are equal
Elasticity
Recap task
Competitive supply – when a firm can supply alternative products using its factors of production, for example land to
grow crops or to grow biofuel
Joint supply – when more than one product can be supplied together, for example wool and sheepskin, beef and
hide
Composite supply – when a product can be supplied to more than one market, for example apples for the cider
market or apples for the apple juice market
Recap Task – factors influencing supply
Price of the product: price rise, higher profits, supply rises
Taxes: tax increase, lower profits, supply increases
Subsidies: subsidy increase, higher profits, supply decreases
Costs of production: higher costs, lower profits, supply decreases
Measuring price elasti city of demand (PED)
% change∈quantity demanded
Price elasticity of demand=
% change∈ price
Measures how responsive the demand is to a change in price
The answer is always negative because of the inverse relationship between quantity demanded and price
Percentages
( new value−old value)
Percentage change= ×100
old value
PED
If PED is:
0:
- There is no change – demand is perfectly inelastic
- The demand curve is vertical – there is no change in demand following a price change
- Examples include basic necessities (like water), life saving products (like medicine), addictive
products (like drugs such as cigarettes), habit-forming products (like people who collect items)
Between 0 and -1
- Demand is price inelastic
- % change in demand is smaller than % change in price, demand not very responsive, relatively steep
demand curve
Exactly -1
- Demand has unit or unitary elasticity
- % change in price and quantity are equal
