Price elasticity of demand and its determinantsPrice elasticity of demand: measures the responsiveness of quantity demanded to a change in price, along a given demand curve. Mathematically the value is negative, but we treat it as positive.Price elastic demand(less than infinity).

Figure 2.1 - Price elastic demandPrice inelastic demand(greater than zero)

Figure 2.2 - Price inelastic demandUnit elastic demand %change in P = %change in Qd Total revenue will not change when price changes (same revenue box)

Figure 2.3 - Unit elastic demandPerfectly elastic demand, demand is zero at all but one price.

Figure 2.4 - Perfectly elastic demandPerfectly inelastic demand, demand is constant at any price.

Figure 2.5 - Perfectly inelastic demandDeterminants of PED:1. Number and closeness of substitutes: more substitutes available & closerhigher PED2. Degree of necessity (and how widely it is defined): lower the degree of necessityhigher PED; the more vague it is defined, i.e. foodhigher PED As it is more narrowly definedmore subjective3. Time period considered: more time to considerhigher PED Inelastic in the short term, elastic in the long term4. Income spent: the higher the income spenthigher PED Value of PED falls as the measuring points move down a demand curve. PED is not represented by the slope of the demand curve.

Applications of price elasticity of demandApplications of PED:1. Governments: if inelastic (low) PEDless consequence if Pimpose more indirect tax2. Firms: if inelastic (low) PEDmore revenue if Pprice of the product risesncome elasticity of demand and its determinantsIncome elasticity of demand: measures the responsiveness of demand to a change in consumers income. Shifts demand curve due to changed incomeDeterminants: Normal goods: positive value of YED Inferior goods: negative value of YED Necessities: Income inelastic of demand Luxuries: Income elastic of demandApplications of income elasticity of demandApplication:1. Firms: can predict the effect of a business cycle on salesPrice elasticity of supply (PES)Price elasticity of supply and its determinantsPrice elasticity of supply: measures the responsiveness of quantity supplied to a change in price along a given supply curve. The value will always be positivePrice elastic supply(less than infinity).

Figure 2.6 - Price elastic supplyPrice inelastic supply(greater than zero).

Figure 2.7 - Price inelastic supplyUnit elastic of supply Mathematically, any straight-line supply curve passing through the origin is unit elastic of supply.

Figure 2.8 - Unit elastic supplyPerfectly elastic supply, only supplied at a certain price level.

Figure 2.9 - Perectly elastic supplyPerfectly inelastic supply, supply is constant at any price level.

Figure 2.10 - Perfectly inelastic supplyDeterminants of PES:1. Time period considered: longer the time period consideredthe more elastic (time to increase the factors of production, such as capital)2. Mobility of factors of production: higher the mobility of factors of productionthe more elastic(easier to change to another production with less costs when price rises)3. Unused capacity: if more capacityproductive resources not being fully usedthe more elastic(increase output easily without great costs)4. Ability to store stocks: if able to store high level of stocksthe more elastic(able to react to price increases with swift supply increases)

Applications of price elasticity of supplyCommodities: are raw materials in the primary production. (i.e. cotton & coffee) Inelastic PED, PES, & YED. Higher degree of necessity, takes time to grow/harvest to increase Qs, few or no substitutesManufactured products & servicerelatively high (elastic) PED, PES, YED.ncome elasticity of demand (YED)

income elasticity of demand and its determinantsIncome elasticity of demand: measures the responsiveness of demand to a change in consumers income. Shifts demand curve due to changed incomeDeterminants: Normal goods: positive value of YED Inferior goods: negative value of YED Necessities: Income inelastic of demand Luxuries: Income elastic of demandApplications of income elasticity of demandApplication:1. Firms: can predict the effect of a business cycle on salesCross price elasticity of demand (XED)Cross price elasticity of demand and its determinantsCross price elasticity of demand: measures the responsiveness of a demand for one good to a change in price of another good. Movement along the curve for one good causing a shift in demand for another goodDeterminants of XED: Substitute goods: positive value of XED Complementary goods: negative value of XED The absolute value of XED depends on the closeness of the relationship between the two goods. (Two goods are unrelated if XED =0)Applications of cross price elasticity of demandApplications of XED:1. Firms on substitutes goods: low positive value?the better?increase price of the product2. Firms on complementary goods: high negative value?the better?increase price of the product