Page 393 onwards in the ‘Book’. Following on from Supply and demand If the price rises the demand falls and vice versus. This is a way of measuring the difference. Demand is Unitary – This means that if the price and quantity are the same then they are equal Cod – Supply is reduced, prices increase. However some people can afford the increase but are environmentalists then the demand is not unitary. They will skew the equation. This is “in-elastic demand”
See previous for details and page 395 of book Price falls by 5% - demand increases by (possibly) only 2%. Perhaps maybes sometimes ish………… This is inelasticity If people deem your goods to high they may look elsewhere. Porters five forces come into play here
PED = Price Elasticity of Demand P1 to P puts price up by 5%
Doh!. Come back Keely, all is forgiven
Equilibrium is achieved at 50p. Mel says “If it’s in the book it’s right” Wow, I just saw a Pig flying over the building!!!!
Mel’s attempt at a graph (He should have kept to stealing pictures from the book).
Price elasticity of demand 04 03
Price Elasticity of Demand
Demand is Elastic if the proportional change in Quantity is greater than the proportional change in price.Example: Price increases by 5% & the quantity demanded falls by 6%... Demand is Unitary when the proportional change in quantity is equal to the proportional change in price.Example: Price falls by 5% & the demand rises by 5%...
Demand is inelastic if the proportional change in quantity is less than the proportional change in price.Example: Price falls by 5% & the demand increases by 2%...
PED = % change in quantity demandedPrice % change in price P Gain in total revenue (5%0 P1 Loss in total revenue (6%) Q Q1 Quantity Elastic demand P.E.D. = (>1)
Price P Inelastic demand P.E.D. = (<1) Loss in total revenue P1 Gain in total revenue Quantity Q Q1
Features of Price Elasticity of Demand Feature Elastic Goods Inelastic GoodsPED value Greater than 1 Less than 1Price rise means Larger fall in demand Smaller fall in demandSlope of demand Flat SteepcurveNumber of Many FewsubstitutesType of good Luxury NecessityPrice of good Expensive CheapExample Jaguar cars Petrol
Priceelasticity of supply (PES) measures the responsiveness of supply to a given change in price. PES = % change in quantity supplied % change in price
Supply is said to be elastic when the quantity changes by a greater proportion than the price change. Inelasticsupply is when quantity changes by a smaller proportion than the price change.
Features of Elasticity of Supply Feature Elastic Goods Inelastic Goods PES Value Greater than 1 Less than 1 A prise rise means A larger rise in supply A smaller rise in supplySlope of supply curve Flat SteepThe good is produced Rapidly Slowly The time period is Months Days The firm has Large stocks Limited stocks Example Screws Beef
Formation of a Market Price Inthe market place the forces of Supply & Demand interact to create a market price. Ineconomics this is known as the equilibrium price – the price at which the quantity demanded equals the quantity supplied…