3.

1 ELASTICITIES
Elasticity is a measure of the responsiveness of a variable to the PRICE or ANY of the VARIABLE’s DETERMINANTS

PED - Price Elasticity of Demand PES - Price Elasticity of Supply

Measures the responsiveness of Quantity demanded to changes in Price Measures the responsiveness of Quantity Supplied to changes in Price

Calculated ALONG a demand curve – will be negative
If quantity demanded is highly responsive to the change in price, demand is then
price elastic
If quantity demanded is not very responsive to the change in price, demand is
then price inelastic
Calculated ALONG a supply curve – will be positive
If quantity supplied is slightly responsive to the change in price, supply is then
price elastic
If quantity supplied is not very responsive to the change in price, supply is then
price inelastic

% change in quantity demanded % change in quantity supplied

PED = %∆Q / %∆P PES = %∆Q / %∆P
PED = PES =
% change in price % change in price

(∆Q / Q) *100 (∆Q / Q) *100

PED = PED = (∆Q / Q) /(∆P/P) PES = PES = (∆Q / Q) /(∆P/P)
(∆P/P) * 100 (∆P/P) * 100

∆Q = Q2 – Q1 Q = Q1 ∆Q = Q2 – Q1 Q = Q1
∆P = P2 – P1 P= P1 ∆P = P2 – P1 P= P1
Ignore negative sign
 PED = 0 PERFECTLY INELASTIC  PES = 0 PERFECTLY INELASTIC SUPPLY
DEMAND  0 < PED < 1 – price INELASTIC SUPPLY
 0 < PED < 1 – price INELASTIC  PED = 1 UNIT ELASTIC SUPPLY
DEMAND  1 <PED < ∞ - price ELASTIC SUPPLY
 PED = 1 UNIT ELASTIC DEMAND  PED = ∞ PERFECTLY ELASTIC SUPPLY
 1 <PED < ∞ - price ELASTIC DEMAND
 PED = ∞ PERFECTLY ELASTIC DEMAND
INELASTIC ELASTIC  Total revenue test does not apply for supply curve.
 TR always increases with increase in price and decreases with decrease in
price
Real world examples
price inelastic demand occurs when a small change in the price of
a product causes a smaller proportionate change in the quantity
demanded.
In other words, customers are not very responsive to the
change in price
This is mainly because there is a lack of substitute products for
consumers to switch to. Or they are necessary products
Examples of products with price inelastic demand include salt, safety
matches, petrol (gas), medications, alcohol, electricity, examination
registration fees, cigarettes and nail clippers.
As the price of peak-time rail travel rises from P1 to P2, the quantity
demanded falls by a smaller proportion from Q1 to Q2, as
commuters are somewhat unresponsive to the change in the price as
they need to get to work.
For the small number of commuters who do switch, this may be
owing to alternatives being available such as taking the bus, cycling
or walking to work.
supply is price inelastic if firms find it difficult to change the quantity
supplied in a short period of time following a change in the market
price.
For example, housing has a low PES value, meaning that firms are
not highly responsive to changes in price in the short-term.
If house prices fall, for example, firms cannot simply reduce the
quantity supplied as it takes time for property developers to put
their construction plans on hold.
Similarly, if property prices increase, construction companies and
property developers cannot easily increase the supply of residential
and office buildings, especially for large projects such as commercial
skyscrapers and large housing complexes.
when firms find it difficult to react swiftly to changes in price.
For example, organic fruits and vegetables take a long time to grow
and harvest, so quantity supplied is relatively unresponsive to
changes in price.
In the diagram, Supply is price inelastic because the percentage
change in quantity supplied (10%) is less than the percentage change
in the price (40%). When price increases from P1 to P2, there is
minimal spare capacity so the quantity supplied can only increase by
a smaller proportion from Q1 to Q2. In this case, the PES = 10% ÷
40% = 0.25.
Perfectly inelastic - the demand for prescription drugs, anti-venom,
clean
water or veterinary services would be close to being perfectly price
inelastic.
Price Elastic demand –occurs when a relatively small change in the
price of a product causes a larger percentage change in the quantity
demanded.
This means that customers are highly responsive to the change in
price
Reasons : Availability of substitutes and NOT a necessity
Examples of products with price elastic demand include motor
vehicles, overseas holidays, fast food, fruits and vegetables,
supermarket own-brand goods and chocolate bars.
The price of Pepsi Cola falls from P1 to P2, the quantity demanded
rises by a greater proportion from Q1 to Q2 as existing customers are cent from Q1 to Q2. In this case, the PES = 150% ÷ 15% = 10.
more willing and able to buy the product and other customers switch Firms that have a high PES (elastic supply) are highly competitive as
from rival soft drinks brands such as Coca-Cola, Fanta and 7-Up.
Perfectly inelastic An example is a football stadium or a concert hall
that cannot accommodate more than the maximum seating capacity
Supply is price elastic if firms can quite easily increase the quantity
supplied without any time delay if there is an increase in the price of
the product.
For example, it is fairly easy for Coca-Cola to mass produce more of
its soft drinks due to an increase in the price. In such a circumstance,
firms that can increase their output at short notice can gain a
competitive advantage as they are able to respond to the higher
market price.
mass produced goods, such as soft drinks or bottled water. if price
increases by 15 per cent from P1 to P2, there is plenty of spare
capacity for the firm to raise output in a short period of time. Hence,
the quantity supplied increases by a greater proportion of 150 per
they are very responsive to changes in price so can adjust supply
according to changing market conditions.
Perfectly elastic demand Perfectly elastic supply
example, Berkshire Hathaway might have a huge stock of Duracell
batteries, so any increase in demand will simply result in the
company
mass producing more Duracell batteries, without the price having to
be
raised. Numerically, the percentage change in price is zero. Hence, as
quantity supplied can be increased from Q1 to Q2 without the need
for
higher prices, the PES = infinity.
 1. Explain why the price elasticity of demand for many primary commodities (such as crude oil or coffee beans) has a relatively low value,
while the demand for manufactured products (such as laptops) has a relatively high PED value.
Definitions: price elasticity of demand (PED), primary commodities, and manufactured products.
• Explanation: of why the price elasticity of demand (PED) for primary commodities (such as crude oil or coffee beans) has a comparatively low
value, i.e. the demand for these products is relatively price inelastic so demand is relatively unresponsive to changes in price.
A key reason is the lack of substitutes as they are essential for production – coffee beans to make coffee, and crude oil to refine into motor
fuel.
Another reason is the high degree of necessity of primary commodities for producers (of oil/petroleum and coffee drinks).
• Explanation: of why the demand for manufactured products (such as laptops) is relatively price elastic, i.e. a high PED value. Reasons for this
could include the large number of substitute laptop brands, and
the relatively high proportion of income spent on purchasing laptop computers, i.e. the price of laptops takes up a much larger proportion of
the average household’s income than the price of coffee beans does, again accounting for its larger PED value.
• Diagrams: relatively price inelastic demand curve for primary products, such as coffee beans or crude oil, and a relatively price elastic
demand curve for secondary products, such as laptops.

The value of PED for primary commodities (raw materials) such as
crude
oil and iron ores is relatively low. This is due to the main
determinants of
PED for primary products:
● Primary commodities such as rice lack close substitutes. For
example,
there are few alternatives for coal, crude oil, gold, metal ores and
rice.
● They are essential (necessities) for production, so their demand is
relatively price inelastic. In other words, relatively unresponsive to
changes in price.
● The proportion of income spent on primary products is relatively
low.
The price of primary commodities used for production tends to
account
for a smaller proportion of overall costs of production, as labour and
By contrast, the demand for manufactured products (such as motor
vehicles, laptops, watches or furniture) is relatively price elastic. The
factors affecting PED can also be used to explain the relatively high
PED
value:
Most manufactured products have many substitutes; for example,
different makes and models of cars, laptops and watches.
● The degree of necessity is lower, as customers might be able to use
their existing manufactured products (such as furniture) for longer in
response to higher market prices or can switch to cheaper
alternatives.
● Manufactured products such as motor vehicles take up a larger
proportion of consumers’ income and therefore demand is relatively
price elastic.
● Manufactured products such as laptops can be used continuously
over a long period of time, so PED tends to be higher in value.
 capital costs tend to be higher.
● The time needed to grow and harvest or extract primary
commodities
is a lot longer than the process to manufacture goods. The shorter
the
time period under consideration, the lower the value of PED.

2. Explain why the price elasticity of demand (PED) for concert tickets is likely to differ from the PED for airline tickets.
Definition: price elasticity of demand (PED).
• Explanation: of why the price elasticity of demand (PED) for concert tickets is likely to be highly price inelastic. The explanation includes
reference to the determinants of PED, such as limited suitable substitutes and a high degree of necessity for the concert tickets. For example,
there are no close substitutes readily available, and loyal fans are willing to pay for the unique experience.
• Explanation of the relatively high PED for airline tickets, based on determinants such as the proportion of income spent, the degree of
necessity vs luxury expenditure (for airline travel), and the number of available substitutes. For example, airline tickets are sold in a highly
competitive market with customers often able to choose from various carriers to the same destination. Buyers can easily compare prices,
especially with online price comparison websites. For domestic travellers, they may also have the option to use substitute travel means, such
as by car, coach or train.
• Diagrams: relatively price inelastic demand curve for concert tickets, and relatively price elastic demand for airline travel/tickets