Elasticity concepts part 2
This note is in continuation of this Elasticity concept article. Now here we are in bit technical side. If you've read 1st article, it'll clear your "technical" knowledge. And make your answers perfect.
Price Elasticity of Demand = % change in quantity demanded / % change in Price
Here are various scenarios that happen:
If PED is 0, then the demand for that good is said to be perfectly price inelastic (or not responsive to change in price). That means even if there is an increase in price, people will still buy that stuff. Economists doubt if such product exists.
When PED is between 0 & 1, demand is said to be price inelastic i.e change in demand is less than change in price. If price changes 5% demand changes by 2%. Businesses try to evaluate PED to know how much change in price of their product will increase it's demand or sales!
Remember Apple iPhone 5C sales - low cost version but not much demand.
When PED is 1, it's said to be perfectly price elastic. That means 2% change in price will increase demand (or sales) of a good by 2% exactly.
If PED is more than 1, than it's said to be price elastic. That means change in demand is more than change in price. For e.g. if Burger price change by 2% than demand changes by say 3%.
(remember letter 'I' is for Investment, so Y for income): is a measure which shows how much demand of a good or service will change in response to change in real Income levels.
Income Elasticity of Demand = % change in quantity demanded / % change in income
If YED is between 0-1: demand is said to be income inelastic. For 'normal goods' with say 3% increase in income, demand will increase by 1%. For Inferior goods with 3% increase in income, demand will reduce by 1%.
If YED is more than 1: demand is said to be income elastic. For 'normal goods' with say 1% increase in income, demand increases by 2%.
When XED is +ve two goods are subtitutes, -ve then they are compliments. Size of XED tells the strength on the connection between 2 goods.
is a measure which shows responsiveness or elasticity of the quantity supplied of a good to changes in price of that good.
Price Elasticity of Demand = % Change in Quantity Supplied / % Change in Price.
When PES is 0: suppliers don't care about price, they continue producing whatever they were producing earlier. Perfectly inelastic supply.
When PES is between 0 &1: inelastic supply, supply don't change in as much proportion as price. If price increase by 2%, supply would change by 1%.
When PES is 1: supply is unitary elastic. If price increase by 1%, supply change by 1%.
When PES above 1: elastic supply, if price increase by 1%, supply change by 2%.
This note is in continuation of this Elasticity concept article. Now here we are in bit technical side. If you've read 1st article, it'll clear your "technical" knowledge. And make your answers perfect.
1) Price Elasticity of Demand (PED):
is a measure which shows how much demand of a good will change in response to change in price of that good.
Price Elasticity of Demand = % change in quantity demanded / % change in Price
Here are various scenarios that happen:
If PED is 0, then the demand for that good is said to be perfectly price inelastic (or not responsive to change in price). That means even if there is an increase in price, people will still buy that stuff. Economists doubt if such product exists.
When PED is between 0 & 1, demand is said to be price inelastic i.e change in demand is less than change in price. If price changes 5% demand changes by 2%. Businesses try to evaluate PED to know how much change in price of their product will increase it's demand or sales!
Remember Apple iPhone 5C sales - low cost version but not much demand.
When PED is 1, it's said to be perfectly price elastic. That means 2% change in price will increase demand (or sales) of a good by 2% exactly.
If PED is more than 1, than it's said to be price elastic. That means change in demand is more than change in price. For e.g. if Burger price change by 2% than demand changes by say 3%.
2) Income Elasticity of Demand (YED):
(remember letter 'I' is for Investment, so Y for income): is a measure which shows how much demand of a good or service will change in response to change in real Income levels.
Income Elasticity of Demand = % change in quantity demanded / % change in income
If YED is between 0-1: demand is said to be income inelastic. For 'normal goods' with say 3% increase in income, demand will increase by 1%. For Inferior goods with 3% increase in income, demand will reduce by 1%.
If YED is more than 1: demand is said to be income elastic. For 'normal goods' with say 1% increase in income, demand increases by 2%.
When XED is +ve two goods are subtitutes, -ve then they are compliments. Size of XED tells the strength on the connection between 2 goods.
4) Price Elasticity of Supply (PES):
is a measure which shows responsiveness or elasticity of the quantity supplied of a good to changes in price of that good.
Price Elasticity of Demand = % Change in Quantity Supplied / % Change in Price.
When PES is 0: suppliers don't care about price, they continue producing whatever they were producing earlier. Perfectly inelastic supply.
When PES is between 0 &1: inelastic supply, supply don't change in as much proportion as price. If price increase by 2%, supply would change by 1%.
When PES is 1: supply is unitary elastic. If price increase by 1%, supply change by 1%.
When PES above 1: elastic supply, if price increase by 1%, supply change by 2%.
No comments:
Post a Comment