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What are Elasticities?

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Introduction

Glossary: Topic 5 Topic 5: Elasticities: Elasticity = measure of responsiveness; measures how much something changes when there is a change in one of the factors that determines it. Elasticity of demand = measure of how much the demand for a product changes when there is a change in one of the factors that determine demand: - Price elasticity of demand (PED) - measure of how much the quantity demanded of a product changes when there is a change in the price of the product: Percentage change in quantity demanded of the product Percentage change in price of product o Negative value indicates inverse relationship o Possible range values = zero to infinity o PED is zero = change in price of a product will have no effect on the quantity sold - perfectly inelastic o PED is infinity = if price changes even slightly, the demand falls to zero, perfectly elastic o Inelastic = value is less than one; change in price leads to a smaller change in demand; if a firm has an inelastic product, they should raise the price o Elastic = value is greater than one; change ...read more.

Middle

- measure of how much the demand for a product changes when there is a change in the price of another product: Percentage change in quantity demanded of the main product Percentage change in price of the other product o XED explains the relationship between products o XED may be positive or negative: > If the value is positive, then the two goods may be said to be substitutes for each other; products that are very closely related (i.e. meats) will have a higher positive value then if they aren't > If the value is negative, then the two goods are complements of each other; products that are very close complements will have a lower negative value than products that are not so close (i.e. computer and computer games); > If the value is zero, then the two products are unrelated > Companies need to be aware of the possible impact that may arise when a rival firm changes its prices; same applies for complementary goods > Positive value = substitutes > Negative value = Complements > Zero = unrelated - Income elasticity of demand (YED) ...read more.

Conclusion

amount, supply will fall to zero, an infinite change o Inelastic supply = value of PES is less than one and greater than zero; a change in price leads to a less proportionate change in the quantity supplied o Elastic Supply = value of PES is greater than one and less than infinity; a change in price leads to a greater than proportionate change in the quantity supplied o Unit Elastic Supply = value of PES is equal to one, a change in the price leads to the same, but opposite change in the quantity supplied; if the price is raised by a certain percentage, then the quantity supplied will fall by the same percentage o Determinants of PES: 1. The Time Period: the longer the time period considered, the more elastic the supply will be; in the immediate term, firms cannot really increase their supply very much if prices increase, since they cannot immediately increase the number of factors of production that they employ, making it inelastic; in the long run, firms may be able to increase their factors of production and so the PES will be a lot more elastic ...read more.

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